Quantifying Private Benefits of Control from a Structural Model of Block Trades

Abstract

We study the determinants of private benefi ts of control in negotiated block transactions. We estimate the block pricing model in Burkart, Gromb, and Panunzi (2000) explicitly accounting for both block premia and block discounts in the data. The evidence suggests that the occurrence of a block premium or discount depends on the controlling block holder's ability to fi ght a potential tender offer for the target's stock. We fi nd evidence of large private benefi ts of control and of associated deadweight losses, but also of value creation by controlling shareholders. Finally, we provide evidence consistent with Jensen's free cash fl ow hypothesis.

Equal opportunity rule vs. market rule in transfer of control: How can private benefits help to provide an answer?

“…Control is a persistent situation, so are private benefits; and the transfer of control is a transfer of private benefits. Albuquerque and Schroth(2010) evaluate the difference between the private benefits of the seller and the buyer.…”

“…They show that private benefits amount to 2.7% of the equity capital of US firms. Albuquerque and Schroth (2010) estimate that private benefits represent 3-4% of the target firm's equity of a sample of US acquisitions. Unfortunately these two studies do not address the question of the possible effect of the EOR rule.…”

“…Whatever the procedure or the form of transfer (public tender offer or private block trade), a new controlling shareholder substitutes for an old one. Albuquerque and Schroth (2010) show that in the USA the private benefits represent a similar part of the equity for the selling controller and the buying controller. As for the third party, outside investors face a new economic story and the firm in which they had previously invested becomes another economic project.…”

“…We show that the relevant analysis should focus jointly on the two key variables setting the transfer of control: the size of the controlling block and the acquisition premium. An empirical analysis has been proposed by Albuquerque and Schroth (2010) in a Market Rule context. A similar study could be done in an EOR environment.…”

The Effect of Private Benefits of Control on Minority Shareholders: A Theoretical Model and Empirical Evidence from State Ownership

“…Indeed, both of these private benefits could redound to the benefit of minority shareholders; both types of private benefits of control could, in other words, produce shared benefits of control." Albuquerque and Schroth (2010) stated that "the presence of private benefits of control does not mean that dispersed shareholders have nothing to gain from having a controlling shareholder".…”