DP7358 Quantifying private benefits of control from a structural model of block trades

Author(s): Rui Albuquerque , Enrique Schroth

Publication Date: July 2009

Keyword(s): Block pricing , block trades , control transactions , deadweight loss , private benefits of control , structural estimation

JEL(s): G12 , G18 , G34

Programme Areas: Financial Economics , Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP7358.asp.asp

We study the determinants of private benefits 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 fight a potential tender offer for the target's stock. We find evidence of large private benefits 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 flow hypothesis.