The Value of Control and the Costs of Illiquidity

The Value of Control and the Costs of Illiquidity

Rui Albuquerque, Enrique Schroth

Series number :

Serial Number: 
357/2013

Date posted :

May 01 2013

Last revised :

November 26 2018
SSRN Share

Keywords

  • control transactions • 
  • search frictions • 
  • marketability discount • 
  • illiquidity spillover • 
  • Corporate governance

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 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. 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.

 
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Authors

Real name: 
Enrique Schroth