Minority Stake Sales and Corporate Control

Abstract

I study how possible future corporate control activity can influence equity sales between firms. In the model, a target and potential acquirer can trade a block of the target's equity before takeover values are learned. I find that a sale can benefit both firms at the expense of other potential bidders. The cost is that the blockholder extracts inefficient private benefits if no takeover occurs. The results imply that corporate control may motivate an equity sale even when no takeover activity is apparent at the time or occurs ex-post. I derive implications for transaction characteristics, block pricing, and stock returns.