Measuring the Private Benefits of Control

There are a number of studies which focus on estimating the PBC as a tool to assess its impact on financial development. PBC are hard to measure because the values of most of them are personal and not verifiable in a direct way (Dyck and Zingales, 2004). Thus, it is difficult to observe these benefits and even more difficult to quantify them in a reliable way. The controlling party can appropriate value for himself only when this value is not verifiable. If it were, it would be relatively easy for non-controlling shareholders to stop them from appropriating it. Thus, private benefits of control are intrinsically difficult to measure (Dyck and Zingales, 2004).

Nonetheless, there are two methods to try to measure the amount of resources captured by the controlling shareholders for their own benefit. The first was pioneered by Lease et al., (1983) and followed by Rydqvist (1987), Zingales (1995), Nenova (2003), and Doidge (2004). They note that the discrepancies between voting-strong shares (shares with many voting rights) and voting-weak shares (shares with fewer voting rights) in market values can partially be explained by the extraction of private benefits by shareholders with voting-strong control rights. They estimate the value of corporate control by the amount of the price differences between two classes of common stocks outstanding, where the two classes have identical cash flows but different voting rights. This was on the basis that if control is valuable, then corporate votes, which allocate control, should be valuable as well (Dyck and Zingales, 2004).

Lease et al., (1983) find that the class of common stock with superior voting rights (voting strong shares) price on average at a 5.44 per cent premium relative to the other class of common shares (voting weak shares). The positive voting premium suggests that the controlling class of shareholders with superior voting rights has an opportunity to receive a higher payoff than other classes of inferior voting rights.

Zingales (1995) suggests that the voting premium reflects the additional payments vote-holders expect to receive for their votes in case of a control contest, and these payments are positively related to the private benefits of control. Thus, the voting premium can be used as a proxy for the private benefits of control.

Barclay and Holderness (1989) established the second method of estimating the value of PBC. Upon analysing the pricing of 63 U.S. block trades between 1978 and 1982, they conclude that the price per share payed by the acquirer of the controlling block reflects the controlling position associated with majority shareholder rights in the company and the private benefits they expect to gain from this position. On the other hand, the market price of the stock on the day after the announcement of the block trade reflects only the cash flow benefits that non-controlling shareholders expect to obtain in proportion to their partial ownership in the company, in the presence of the new block-holder (Barclay and Holderness, 1989). This difference between the price per share paid by the acquirer of the block and the price quoted in the market the day after the announcement of the block trade represents an estimate of the PBC.

Similarly, Dyck and Zingales (2004) use the same approach to estimate the PBC in 39 countries using 393 controlling-block sales. They found, on average that the value of control is 14 per cent. However, they report two short-coming in using this method: 1) applies to the first method of estimating the average premium associated with superior voting shares established by Lease et al. (1983), whereby the methods are only able to capture the value component of private benefits. If an incumbent enjoys a psychic benefit from running the family company, this value is unlikely to be shared by any other potential buyer.  Hence, the two methods tend to underestimate the value of control and more so in countries where the major source of private benefit is non-pecuniary. 2) sales of controlling blocks are relatively rare and might not occur randomly over time. Furthermore, any systematic overpayment or any delay in incorporating public information can bias the estimates.

Given the different and broad types of PBC as well as difficulties in estimating its size directly, the thesis adopts an indirect approach linking minority shareholder protection to financial market development. Accordingly, the following sections present some evidences of minority shareholders expropriation with elaborate discussion for unfair self-dealing transactions as dominant form of minority shareholder expropriations.


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