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1

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

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

2

Private Benefits of Control: An International
Comparison
PBoC depend on

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

3

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

Control Premium (Barclay & Holderness)
Voting rights

4

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

Privately negotiated sale of control block of
shares > what premium do they sell at?

5

Private Benefits of Control: An International
Comparison
Voting rights method

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

6

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

model free, no need to estimate probability
of takeovers

7

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

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

8

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

- 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

9

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

- 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

10

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

§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

11

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

§Legal

§Extra legal institutions

12

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

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

13

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

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

14

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

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

15

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

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

16

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

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.

17

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

§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)

18

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

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

19

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

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

20

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

§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