Valuing Control and Marketability

Abstract

This study explores the value of control and marketability rights and illuminates how discounts for non-marketability and lack of control might be estimated. Such discounts are prominent issues in corporate valuation and shareholder litigation. Using simulation analysis, the study reports estimated discounts using conventional assumptions and assesses the relative effects of two different aspects of control: strategic flexibility (the right to change the strategy of the firm), and private benefits (the right to expropriate the wealth of minority shareholders). Simulation reveals a number of fresh insights including that control and marketability effects interact in a complex way not well described by conventional treatments of them; that control effects dominate marketability effects; that the minority discount grows larger with the range of strategic choices and smaller with the correlation among strategic alternatives. The study simulates the discount for non-marketability and lack of control in the aborted merger of Volvo and Renault and finds estimates consistent with observed values.

Note: This paper was previously presented under the title, "Liquidity and Control Options: How Much Does It Cost Not to Hold Them?"