Private Benefits of Control An International Comparison Flashcards
Dysck, Zingales (2004)
What is the main idea of paper?
PBOC’s are explained and measured as the difference between the controlling stake and market value of the shares. Concluding: more PBOC = less stock market, less competition, weaker institutions.
What are PBOC?
Benefits that are not shared among all shareholders in proportion of the shares owned, but are exclusively enjoyed by parties in control.
What does PBOC involve?
PBOC involves costs: maintaining a control block means lack of diversification + reptational losses or even legal liabilities.
Can PBOC be positive?
PBOC is not always bad: managers exploiting profitable investments without company’s assent might actually create value.
How to measure PBOC?
Difficult to measure directly. If PBOC were easily observable and quantifiable, they would not be private and would be claimed by minority shareholders in court.
How to capture PBOC?
- Control premuim: the difference between price per share of the control block and the market price per share. Drawbacks: Sales of control blocks are rather rare.
- Price difference between shares in a dual-class system. Extra voting rights as a proxy for corporate control. Drawback: dual class shares are not allowed in every country.
What is the Issue with PBOC capturing?
Issue: Both measures capture only common value component. If there is a benefit of owning a company that is unique for an incumbent, it is by definition impossible to find a buyer that will agree on the value of PBOC in case
Hoe does the size of block traded affect the size of PBOC premium?
(pay more for 51% of shares than 30% because when you have 51% you are in total control). THere is no significant presence of another large shareholder (if there is another large shareholder, you have to share your PBOC).
What is sellers bargaining power and how does it affect size of PBOC premium?
Sellers bargaining power reflects whether seller is in a position to demand more money from the buyers. If the company is in financial distress, a large seller is willing to sell shares for less. PBOC are then undervalued/can be negative because of lack of investor’s diversification.
How does foregneirs affect size of PBOC premium?
Foreigners pay more. Industry is insignificant. Controlling meadia company gives you enormous power of manipulating public opinion in personally beneficial ways.
How does PBOC affect financial development?
Selling control in private negotiation is more profitable than in the market with dispersed buyers buying many noncontrolling stakes.
What are three implications for countries with high PBOC?
- Fewer companies are public; the equity markets are underdeveloped which hinders firm financing.
- Afraid of ending up in the minority position, incumbents seek to retain control after going public, thus there should be less widely held companies.
- To maximize profit, governments should sell companies privately rather than in public offerings.
How legal institutions helps curbing and eliminating PBOC?
- The legal environment: greater ability to sue controlling shareholders.
- Disclosure standards: more extensive and accurate disclosed information is, the more curbs appropriation.
- Enforcement: quicker, smoother enforcement, the stronger legal protection of shareholders.
Legal institutions are strongly associated with lower levels of private benefits.
How does Produvt market competition and Public opinion pressure work?
Product - through prices, competitive markets can verify manipulated transfer prices.
Public - Value appropriation can be limited by expected reputational losses.
Do moral norms and labor as monitor work?
No they do not work.
