When majority shareholders want to expropriate minority shareholders, they can try to extract private benefits from the firm. But It is difficult to find a good proxy for private benefits. Should we consider them as a constant fraction of the benefits or some variable amount deducted from the benefits of the firm leaving just enough profitability for the minority shareholders not to forgive the firm? Or should we treat them as a random process correlated with profits, or at last, should we consider something else knowing that this practice may take place when the wedge (difference between ownership and voting rights) is high and the entrenchment of the CEO more or less established?
This is an intriguing question and difficult to answer. Private companies must be profitable. That may sound provocative, in times when so much is said about the social aspect of companies' actions. But imagine the socially negative aspects of the a break in one large-group - unfortunately, there are many examples in business history. For a manager, such negative result is like a doctor viewing a mortal disease in one patient. Thus, profit is the form of a company to "sustain", to remunerate the capital invested - what represent the savings of many families.
On the other hand, there are numerous corporate scandals, also abundant in the press, which graphically illustrate the importance that companies obtain profitability by offering goods and services that meet the real needs of society, in an atmosphere of real competition. This means that a company must be competitive and profitable in an increasingly complex situation of global competition.
Finally, companies employ people. It is vital to offer to them an environment with conditions of personal and professional growth .
The private benefits can be estimated by following some empirical methods.
1. The difference between the price paid by the acquirer of the block and the price quoted on the stock market (Barclay and Holderness, 1989).
2. The difference between the price of the shares with voting rights and those without voting rights (Zingales, 1994; Nenova, 2000).
3. The relationship between large shareholders and corporate risk-taking. The large shareholders holding a undiversified portfolio, will be risk averse. They will avoid riskier projects even if this projects have a positive NPV (John at al, 2008; Faccio et al., 2011).
Thank you Fabrizio for these indirect ways to measure the value of private benefits. I know most of the papers you quote, but I am more interested in a direct measure of private benefits for modelization purposes. But I will have a look at the Faccio et al (2011) paper anyway Thanks you..
I find that the third way is very interesting and less investigated.
Hi,
Large shareholders may be institutional shareholders and they will require more transparency and better firm's disclosure like in Boone and White Journal of financial economics (2015), 117, p508-533. But family blockholders, may be undiversified and prone to avoid risky projects. Thus they may be good candidates for private benefits extraction. But it may not be the case if the founder is still operating. In fact, successors may be better ones, if they have not always in mind long term firm survival. But the question is still how to measure private benefit (excessive CEO compensation, perks...). What about this suggestion: If family's wealth grows at a higher rate that the company wealth, may it be considered as a signal?
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