Package 4

Question 1

Private Benefits of Control: An International
Comparison
What are Private Benefits of Control?

Answer 1

added value (positive or negative) obtained from having the controlling share

Question 2

Private Benefits of Control: An International
Comparison
PBoC depend on

Answer 2

§Firm characteristics (size, maturity)
§Whether controlling block is traded
§Bargaining power of involved parties
§Industry

Question 3

Private Benefits of Control: An International
Comparison
Two methods of measure of PBoC

Answer 3

Control	Premium	(Barclay	&	Holderness)
Voting	rights

Question 4

Private Benefits of Control: An International
Comparison
Control Premium (Barclay & Holderness)

Answer 4

Privately negotiated sale of control block of

shares > what premium do they sell at?

Question 5

Private Benefits of Control: An International
Comparison
Voting rights method

Answer 5

Dual class shares-> voting shares trade at a premium that includes probability of a control contest & premium for control

Question 6

Private Benefits of Control: An International
Comparison
Advantage of Control Premium (Barclay & Holderness) as a method of PBoC measure

Answer 6

model free, no need to estimate probability

of takeovers

Question 7

Private Benefits of Control: An International
Comparison
Advantage of voting rights method of PBoC measure

Answer 7

+ based on many firms and thus less likely to be driven by outliers

Question 8

Private Benefits of Control: An International
Comparison
Disadvantages of Control Premium (Barclay & Holderness) as a method of PBoC measure

Answer 8

• psychic value is not included in the price
• sales of controlling blocs are relatively rare, and don’t occur randomly over time
• systematic over-payment and information
  inefficiency bias the results

Question 9

Private Benefits of Control: An International
Comparison
Disadvantage of voting rights method of PBoC measure

Answer 9

• psychic value is not included in the price
• dual class shares are not allowed in every country > limits # of countries for study
• proportion of dual class firms varies across countries

Question 10

Private Benefits of Control: An International
Comparison
Evidence for the existence of PBoC

Answer 10

§Average corporate control is worth 14% of the equity value of a firm

§Premium higher if buyer comes from a country with weak shareholder protection

Question 11

Private Benefits of Control: An International
Comparison
Limiting PBoC - two ways

Answer 11

§Legal

§Extra legal institutions

Question 12

Private Benefits of Control: An International
Comparison
Components of legal limiting of PBoC

Answer 12

ØLegal Environment
ØDisclosure & Accounting Standards
ØLaw Enforcement
ØLegal protection of minority shareholders

Question 13

Private Benefits of Control: An International
Comparison
Components of extra-legal limiting of PBoC

Answer 13

ØProduct	– market	 competition
ØPublic	opinion	&	Media	pressure
ØMoral	norms
ØLabor	(as	a	monitoring	tool)
ØTax	enforcement	&	compliance

Question 14

Private Benefits of Control: An International
Comparison
Why in high in former communist countries are high PBoC

Answer 14

§Lack	of	society	values	and	culture
§Lack	of	legal	institutions	and	quality	of	enforcement
§Less	developed	capital	markets
§Privately	negotiated	privatizations
§Ownership	concentration

Question 15

Private Benefits of Control: An International
Comparison
§ When PBoC are large:

Answer 15

Øownership is more concentrated
Øprivatizations are not public
Øcapital markets are less developed

Question 16

The Corporate Governance Role of
the Media: Evidence from Russia
What about is the article

Answer 16

Article studies the effect of media coverage (when the info about the company is displayed in public media) on corporate governance by studying the case of Russia in 1999 - 2002.

Question 17

The Corporate Governance Role of
the Media: Evidence from Russia
The effect of media

Answer 17

§Reduces the costs of staying informed (Information diffusion)
§Solves “rational ignorance” paradox
§Increases the effect of reputation
§Increases awareness
§Increases the reputation costs
§Changes the probability of enforcement
§Impacts the size of penalty (by affecting the judge)

Question 18

The Corporate Governance Role of
the Media: Evidence from Russia
The effect of media on changes the probability of enforcement

Answer 18

ØCare about future employers (voters)
ØReduce the power of vested interests
ØCare about reputation (e.g. that of foreign countries)

Question 19

The Corporate Governance Role of
the Media: Evidence from Russia
Media affect depends on:

Answer 19

§Diffusion (# of relevant groups)
§Credibility (foreign vs. local)
§Surrounding environment

Question 20

The Corporate Governance Role of
the Media: Evidence from Russia
Why Russia

Answer 20

§Extreme corporate governance violations (scale & number)
§Non-existent or inefficient mechanisms to address the violations
§Existence of Hermitage Fund that practices media strategy
§Unbiased sample – reputation costs of a decision used to be low
§Major regime shift