47 Pages Posted: 3 Jun 2004
Date Written: March 2005
Many issues in corporate governance arise from agency problems, and what's at the heart of agency problems are private benefits. One significant aspect of private benefits that the previous literature has not analyzed is how much private benefits is arising from having ownership of the company and how much is coming from having control of the company.
This paper empirically decomposes private benefits into two components: benefits accruing to ownership and benefits accruing to control. It documents that private benefits, as measured by block premium, increases slowly with respect to the ownership level, as measured by the percentage of shares acquired in block trade, but increases rapidly with respect to the likelihood of exercising control of the firm, as measured by the probability of top executive turnover following block trade. To illustrate, for a ten-percent block trade, the block premium is 1.20%, 5.75%, 12.80% if there is a zero-percent, twenty five-percent, fifty-percent likelihood of subsequent top executive turnover, respectively. However, for a twenty-percent block trade, the block premium is 2.38%, 9.68%, 19.48% if there is a zero-percent, twenty five-percent, fifty-percent likelihood of subsequent top executive turnover, respectively.
By decomposing private benefits into ownership and control, I am able to come up with a measure of non-pecuniary private benefits. Since all pecuniary private benefits must involve at least some control over the firm's activities, the block premiums when the likelihood of exercising control is zero can be used as an estimate of non-pecuniary private benefits. The fraction of non-pecuniary benefits out of the total private benefits ranges from 18% (block trade of 5%) to 29% (block trade of 50%) when the total private benefits are computed at the mean likelihood of exercising control of the firm. Therefore, although much of the private benefits arise from having control over the firm, non-pecuniary private benefits comprise a non-trivial portion of the total private benefits.
Keywords: private benefits of control, block premium, ownership structure, executive turnover
JEL Classification: C35, G32, G34
Suggested Citation: Suggested Citation