The 'Lemons Effect' in Corporate Freeze-Outs

Lucian Bebchuk () and Marcel Kahan

No 6938, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In a corporate freeze-out, the controller is required to compensate minority shareholders for the no-freezeout value of their shares that are taken from them. This paper seeks to highlight the difficulties involved in determining this no-freezeout value when private information. In particular, the analysis shows that the pre-freezeout market price of minority shares cannot be used an a proxy for the no-freezeout value that these shares would have in the absence of a freeze-out. It is shown that, under a regime in which frozen out minority shareholders receive a compensation equal to the pre-freezeout market price, the pre-freezeout market price will be set a level below the expected no-freezeout value of minority shares. The reason for this is a lemons effect' that arises when a controller uses her private information in deciding whether to affect a freeze-out. By showing how controllers are able to use their private information to affect freeze-outs at terms favorable to them, this paper demonstrates that freeze-outs can become a significant source for private benefits of control.

JEL-codes: G30 (search for similar items in EconPapers)
Date: 1999-02
New Economics Papers: this item is included in nep-cfn and nep-mic
Note: CF LE
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Citations: View citations in EconPapers (4)

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