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Title: Determinants of the Block Premium and of Private Benefits of Control

Author(s): Rui Albuquerque and Enrique Schroth

Publication Date: March 2008

Keyword(s): Block pricing, block trades, control transactions, mandatory bid rule, market rule, private benefits of control and structural estimation

Programme Area(s): Financial Economics

Abstract: Note: A substantially revised version of this paper has been published as CEPR DP7358, "Quantifying private benefits of control from a structural model of block trades." Please refer to DP7358 for the most up-to-date version. 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 dealing with the existence of both block premia and block discounts in the data. We find evidence that the occurrence of block premia and block discounts depends on the controlling block holder's ability to fight a potential tender offer for the target's stock. Private benefits represent 3% of the target firm's stock market value. Private benefits increase with the target's cash holdings and decrease with its short term debt providing evidence in favour of Jensen's free cash flow hypothesis. A counterfactual policy evaluation of the Mandatory Bid Rule suggests that it fails to add value to shareholders because it fails to prevent welfare decreasing transactions and, by forcing inefficient tender offers, it deters welfare increasing transactions.

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Bibliographic Reference

Albuquerque, R and Schroth, E. 2008. 'Determinants of the Block Premium and of Private Benefits of Control'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6742