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Asian Review of Financial Research Vol.36 No.3 pp.1-30
The Effect of Mandatory Bid Rule on Private Benefits of Control
Bushik Kim 고려대학교 경영대학 박사과정(Ph.D. Candidate, Korea University Business School)
Woochan Kim* 고려대학교 경영대학 교수(Professor, Korea University Business School)
Yongjoon Lee 고려대학교 경영대학 석사과정(Master Student, Korea University Business School)
Key Words : Mandatory Bid Rule,Equal Opportunity Rule,Private Benefits of Control,Control Premium,Self-limitation Mechanism


This study explores whether adopting mandatory bid rule mitigates private benefits of control during instances of control transfer. We posit that implementing the mandatory bid rule could motivate the acquirer to self-limit their private benefits of control. According to the model proposed by De la Bruslerie (2013), an acquirer's offer of a higher control premium, signaling their intention to extract more significant private benefits following the control transfer, would likely make minority shareholders more inclined to tender their shares. This is due to the attractive offering price and the elevated risk of expropriation. Such a scenario would invariably necessitate the acquirer to purchase shares beyond the optimal threshold, thereby shouldering the consequential costs. Foreseeing these potential consequences, acquirers would be motivated to reduce the control premium and moderate their intention of extracting private benefits. To test our hypothesis, we exploit the staggered adoptions of mandatory bid rule in 41 nations over a 50-year period (1972 to 2022). We take multiple steps and go through a meticulous process to ensure our samples can accurately measure the private benefits of control. This yields 1,421 deals as the final sample. We define private benefits of control as the relative difference between the price paid to the incumbent blockholder and the market price of shares immediately following the deal announcement, multiplied by the proportion of shares acquired (Dyck and Zingales, 2004). Employing a difference-in-differences approach, our findings align with the theory suggesting that the mandatory bid rule encourages acquirers to reduce the private benefits of control. The deals above the threshold exhibit significantly lower private benefits of control after the rule's adoption, while those below the threshold show negligible changes post-adoption. In tandem, we observe a similar trend with control premiums. The results remain intact to a series of robustness checks. First, the results are even more pronounced when restricting the sample to countries where we have samples before and after the rule adoption. Second, the results survive even when limiting the sample to deals where incumbent controlling shareholders owned substantial equity stakes in the target firms. Third, the results stand firm even after financially distressed target firms are excluded from the analysis. We also find evidence that our results are not merely driven by selection bias, which would occur if acquirers seeking high private benefits predominantly acquired shares below the threshold and acquirers pursuing low private benefits mainly acquired shares above the threshold. Above all, the increase in private benefits of control after adopting the mandatory bid rule for deals below the threshold is substantially smaller in magnitude compared to the decrease in private benefits of control for deals above the threshold. Additionally, the deal-fraction analysis of Lee, Kim, and Kim (2023) reveals that the fraction of deals above the threshold does not drop significantly after adopting the mandatory bid rule. Overall, our study offers the first empirical evidence of the effect of mandatory bid rules on the private benefits of control. Specifically, we show that the mandatory bid rule influences acquirers to reduce the private benefits of control. Our results also provide an important implication for the ongoing debate regarding whether the mandatory bid rule increases acquisition costs. Should the rule lower private benefits of control (and the control premium), as shown in this study, it is unlikely that the acquisition cost will rise, thereby not impeding acquisition activities.
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