The 'Lemons Effect' in Corporate Freeze-Outs / Lucian Arye Bebchuk, Marcel Kahan.

Format:

Book

Author/Creator:

Bebchuk, Lucian Arye.

Contributor:

National Bureau of Economic Research.

Kahan, Marcel.

Series:

Working Paper Series (National Bureau of Economic Research) no. w6938.

NBER working paper series no. w6938

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1999.

Summary:

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.

Notes:

Print version record

February 1999.