The Value of Control and the Costs of Illiquidity

Rui Albuquerque and Enrique Schroth

Journal of Finance, 2015, vol. 70, issue 4, 1405-1455

Abstract: type="main">

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, blockholders' marketability discount, and dispersed shareholders' illiquidity-spillover discount.

Date: 2015
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