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The role of convenience yield in going-private transactions

Konstantinos Konstantaras () and Vasilios Sogiakas

No 1401, CFI Discussion Papers from Centre for Finance and Investment, Heriot Watt University

Abstract: In this paper we examine the liquidity aspects of going private transactions and introduce the concept of liquidity regeneration which describes the valuation benefit accruing to a listed parent with more liquid stock squeezing out a relatively more illiquid subsidiary. We develop a theoretical model to proxy this convenience yield effect by the differential cost of transacting in the parent versus its subsidiary stock and find it significantly influential on the economics of the decision to take a listed company private. By the means of a liquidity arbitrage, parent shareholders may take advantage of the double benefit of a lower bidding price, improved cumulative abnormal returns and thinner liquidity discount, post a successful deal consummation. Our results justify that relatively higher target illiquidity underlies superior abnormal returns and lower takeover premiums, to the degree that parent companies may indulge in manipulating their subsidiary stock liquidity to maximize their returns.

Keywords: Convenience Yields; Liquidity; Delisting (search for similar items in EconPapers)
JEL-codes: G1 (search for similar items in EconPapers)
Date: 2014
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