The Value of Control and the Costs of Illiquidity

Abstract

We develop a search model of block trades that values the illiquidity of controlling stakes. The model considers several dimensions of illiquidity. First, following a liquidity shock, the controlling blockholder is forced to sell, possibly to a less e¢ cient acquirer. Second, this sale may occur at a …re sale price. Third, absent a liquidity shock, a trade occurs only if a potential buyer arrives. Using a structural estimation approach and U.S. data on trades of controlling blocks of public corporations, we estimate the value of control, the blockholders' marketability discount and the dispersed shareholders'illiquidity-spillover discount.

Fire Sales and House Prices: Evidence from Estate Sales Due to Sudden Death

“…These findings suggest that discounts arise when sales are urgent even when potential buyers are unaffected by the event forcing the sale. These results are consistent with Albuquerque and Schroth (2012), who model asset sales by use of a search model. Search frictions in the housing market result in fire sale discounts when sellers are forced to find buyers over short time horizons.…”

“…Although prior literature has documented that fire sale discounts exist and can be substantial (Pulvino, 1998;Coval and Stafford, 2007;Eckbo and Thorburn, 2008;Campbell, Giglio, and Pathak, 2011;Albuquerque and Schroth, 2012), it has been difficult to empirically identify when forced sales result in fire sale discounts. Forced sales are typically triggered by industry-wide or asset specific adverse shocks that affect both supply and demand for the asset.…”