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Search Frictions and the Liquidity of Large Blocks of Shares

Author

Listed:
  • Rui Albuquerque

    (Boston University School of Management, ECGI, and CEPR)

  • Enrique Schroth

    (University of Amsterdam)

Abstract

This paper investigates empirically the illiquidity of majority blocks of shares in the context of a search model of block trades. The search model incorporates two aspects of illiquidity, or search frictions. First, upon a liquidity shock, the incumbent blockholders may be forced to sell to a less efficient buyer. Second, a block liquidity sale may occur at a fire sale price. We conduct a structural estimation of the model using data on majority block trades in the U.S. The structural estimation is particularly useful in this exercise as it allows us to evaluate the counterfactual price that would result absent liquidity shocks. Our results help shed light into the size of the marketability discount, the control discount and an illiquidity-spillover discount we identify, and on the determinants of aggregate liquidity.

Suggested Citation

  • Rui Albuquerque & Enrique Schroth, 2011. "Search Frictions and the Liquidity of Large Blocks of Shares," Tinbergen Institute Discussion Papers 11-029/2/DSF11, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20110029
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    More about this item

    Keywords

    Block pricing; marketability discount; liquidity; control transactions; search frictions; structural estimation;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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