NBER

Marcel Kahan

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NBER Working Papers and Publications

January 2000Adverse Selection and Gains to Controllers in Corporate Freezeouts
with Lucian Arye Bebchuk
in Concentrated Corporate Ownership, Randall K. Morck, editor
February 1999The 'Lemons Effect' in Corporate Freeze-Outs
with Lucian Arye Bebchuk: w6938
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 contr...

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