DP9090 The Value of Control and the Costs of Illiquidity

Author(s): Rui Albuquerque, Enrique Schroth
Publication Date: August 2012
Keyword(s): control discount, Control transactions, corporate governance, illiquidity spillover, marketability discount, search frictions
JEL(s): G34
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9090

An inherent difficulty in valuing controlling blocks of shares is the illiquidity of the market. We explore the pricing implications associated with the illiquidity of controlling blocks of shares in the context of a search model of block trades. The model considers several dimensions of illiquidity. First, following a liquidity shock, the controlling blockholder is forced to sell, possibly to a less efficient acquirer. Second, this sale may occur at a fire sale price. Third, absent a liquidity shock, a trade occurs only if a potential buyer arrives. We use a structural estimation approach and U.S. data on trades of controlling blocks of public corporations to identify these dimensions of illiquidity. We obtain estimates of counter-factual valuations that would result in the absence of illiquidity that are used to measure the blockholders? marketability discount and the dispersed shareholders? illiquidity-spillover discount.