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The Value of Control in Private Companies

  • Johan Van den Cruijce ORCID logo EMAIL logo , Cynthia Van Hulle , Wouter De Maeseneire und Bettina De Ruyck
Veröffentlicht/Copyright: 17. März 2025
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Review of Law & Economics
Aus der Zeitschrift Review of Law & Economics Band 21 Heft 1

Abstract

The controlling shareholder of a company has the potential to extract private benefits of control (PBC). In contrast to shared benefits, PBC are proceeds that accrue only to the majority shareholders. They can take a variety of forms that range from outright theft to a (covert) compensation for private costs incurred in controlling the company. It is notoriously difficult to measure PBC and the literature only provides a rough guidance based on two methods: the control premium method and the voting premium method. These two methods are based on the logic that PBC must be the reason why the controlling shareholder pays a premium over the market price for a controlling block or why voting and non-voting shares are priced differently. This paper introduces a third method to estimate the PBC. We look at the discount (compared to a baseline valuation made at the controlling level) that minority shareholders ask to invest in a company. In the context of private companies, we find a discount of 16.72 % that translates into estimated PBC of 20.08 % (premium per share). We argue that the discount for lack of control can be explained as a discount for private benefits.

Keywords: private benefits of control; discount; valuation; private companies; DLOC
JEL Classification: G30; G34; K22
Corresponding author: Johan Van den Cruijce, Vlerick Business School, Gent, Belgium, E-mail: 

Dr. Johan Van den Cruijce is managing director at Atlas Services Belgium (Orange group) and postdoctoral research fellow at Vlerick Business School (Belgium). Professor Dr. Cynthia Van Hulle is Professor of Finance at KU Leuven (Belgium); Professor Dr. Wouter De Maeseneire is Professor of Finance at Ghent University and Vlerick Business School (Belgium); Bettina de Ruyck is Doctoral Researcher in Strategic Management at Vlerick Business School and Ghent University (Belgium). The authors thank the reviewers, the editor and Dr. Kim Sanghoon, Assistant Professor, Department of Economics, University at Buffalo for their valuable comments and guidance on methodology which greatly benefited the article.

The views, opinions, and assumptions expressed in this article only reflect the authors’ analysis and do not necessarily state or reflect those of any other person, entity or institution. We thank Alina Salgado (J.D. Candidate at the University of Georgia School of Law) and Nicolas Janssens de Bisthoven (legal counsel at Atlas Services Belgium) for their assistance in reviewing the manuscript. The data collection was performed with the assistance of Emina Šadić Herzberger, Gamble Baffert II, Jackson Nock, Nishka Malik, Christophe Minnart, Julie Van Opdenbosch, Vincent Van den Cruijce and Anisa Sula. We also gratefully acknowledge the help of Sandrine Ferreira-Terreygeol (Executive Assistant at Atlas Services Belgium) in the editing of the manuscript.

Exhibit A: Court Cases and Observations

# Date Case Obs. Reporter
1 3-May-2021 Estate of Jackson v. Comm’r 1 T.C. Memo 2021-48 *; 2021 Tax Ct. Memo LEXIS 74 **; 121 T.C.M. (CCH) 1320
2 27-Oct-2020 Lucero v. United States 1 2020 U.S. Dist. LEXIS 199605 *; 2020 WL 6281591
3 10-Jun-2020 Nelson v. Comm’r 2 T.C. Memo 2020-81 *; 2020 Tax Ct. Memo LEXIS 79 **
4 2-Mar-2020 Grieve v. Comm’r 2 T.C. Memo 2020-28 *; 2020 Tax Ct. Memo LEXIS 28 **
5 19-Aug-2019 Estate of Jones v. Comm’r 2 T.C. Memo 2019-101 *; 2019 Tax Ct. Memo LEXIS 108 **
6 26-Mar-2019 Kress v. United States 3 372 F. Supp. 3d 731 *; 2019 U.S. Dist. LEXIS 49850 **; 2019-1 U.S. Tax Cas. (CCH) P60,711
7 24-Oct-2018 Estate of Streightoff v. Comm’r 1 T.C. Memo 2018-178 *; 2018 Tax Ct. Memo LEXIS 179 **; 116 T.C.M. (CCH) 437
8 9-Dec-2015 Redstone v. Comm’r 1 T.C. Memo 2015-237 *; 2015 Tax Ct. Memo LEXIS 242 **; 110 T.C.M. (CCH) 564
9 11-Feb-2014 Estate of Richmond v. Comm’r 1 T.C. Memo 2014-26 *; 2014 Tax Ct. Memo LEXIS 26 **; 107 T.C.M. (CCH) 1135
10 18-Oct-2013 Estate of Tanenblatt v. Comm’r 1 T.C. Memo 2013-263 *; 2013 Tax Ct. Memo LEXIS 273 **
11 8-Apr-2013 Estate of Koons v. Comm’r 1 T.C. Memo 2013-94 *; 2013 Tax Ct. Memo LEXIS 98 **; 105 T.C.M. (CCH) 1567
12 7-Feb-2013 Estate of Kite v. Comm’r 1 T.C. Memo 2013-43 *; 2013 Tax Ct. Memo LEXIS 43 **; 105 T.C.M. (CCH) 1277
13 28-Jun-2011 Estate of Gallagher v. Comm’r 1 2011 Tax Ct. Memo LEXIS 150 *; T.C. Memo 2011-148; 101 T.C.M. (CCH) 1702
14 22-Jun-2011 Estate of Giustina v. Comm’r 1 2011 Tax Ct. Memo LEXIS 141 *; T.C. Memo 2011-141; 101 T.C.M. (CCH) 1676
15 13-May-2010 Pierre v. Comm’r 1 2010 Tax Ct. Memo LEXIS 143 *; T.C. Memo 2010-106; 99 T.C.M. (CCH) 1436
16 2-Oct-2009 Estate of Murphy v. United States 3 2009 U.S. Dist. LEXIS 94923 *; 2009-2 U.S. Tax Cas. (CCH) P60,583; 104 A.F.T.R.2d (RIA) 2009-7703
17 29-Jan-2009 Estate of Marjorie deGreeff Litchfield v. Comm’r 2 2009 Tax Ct. Memo LEXIS 21 *; T.C. Memo 2009-21; 97 T.C.M. (CCH) 1079
18 22-Jul-2008 Bergquist v. Comm’r 2 131 T.C. 8 *; 2008 U.S. Tax Ct. LEXIS 20 **; 131 T.C. No. 2
19 27-May-2008 Holman v. Comm’r 3 130 T.C. 170 *; 2008 U.S. Tax Ct. LEXIS 12 **; 130 T.C. No. 12
20 5-May-2008 Astleford v. Comm’r 3 2008 Tax Ct. Memo LEXIS 129 *; T.C. Memo 2008-128; 95 T.C.M. (CCH) 1497
21 28-Sep-2006 Dallas v. Comm’r 2 2006 Tax Ct. Memo LEXIS 216 *; T.C. Memo 2006-212; 92 T.C.M. (CCH) 313
22 9-May-2006 Huber v. Comm’r 1 2006 Tax Ct. Memo LEXIS 97 *; T.C. Memo 2006-96; 91 T.C.M. (CCH) 1132; RIA TM 56510
23 10-Mar-2006 Temple v. United States 4 423 F. Supp. 2d 605 *; 2006 U.S. Dist. LEXIS 16171 **; 2006-1 U.S. Tax Cas. (CCH) P60,523; 97 A.F.T.R.2d (RIA) 2006-1649
24 11-Oct-2005 Estate of Kelley v. Comm’r 1 2005 Tax Ct. Memo LEXIS 236 *; T.C. Memo 2005-235; 90 T.C.M. (CCH) 369
25 31-May-2005 Estate of Jelke v. Comm’r 1 2005 Tax Ct. Memo LEXIS 128 *; T.C. Memo 2005-131; 89 T.C.M. (CCH) 1397
26 15-Mar-2005 Estate of Bongard v. Comm’r 2 124 T.C. 95 *; 2005 U.S. Tax Ct. LEXIS 8 **; 124 T.C. No. 8
27 26-Jul-2004 Estate of Thompson v. Comm’r 1 499 F.3d 129 *; 2007 U.S. App. LEXIS 20066 **; 2007-2 U.S. Tax Cas. (CCH) P60,546; 100 A.F.T.R.2d (RIA) 2007-5792
28 29-Dec-2003 Estate of Green v. Comm’r 1 2003 Tax Ct. Memo LEXIS 348 *; T.C. Memo 2003-348; 86 T.C.M. (CCH) 758; RIA TM 55384
29 25-Sep-2003 Peracchio v. Comm’r 1 2003 Tax Ct. Memo LEXIS 279 *; T.C. Memo 2003-280; 86 T.C.M. (CCH) 412
30 3-Sep-2003 Lappo v. Comm’r 2 2003 Tax Ct. Memo LEXIS 257 *; T.C. Memo 2003-258; 86 T.C.M. (CCH) 333
31 20-Aug-2003 Hess v. Comm’r 1 2003 Tax Ct. Memo LEXIS 250 *; T.C. Memo 2003-251; 86 T.C.M. (CCH) 303
32 13-Jun-2003 Estate of Deputy v. Comm’r 1 2003 Tax Ct. Memo LEXIS 174 *; T.C. Memo 2003-176; 85 T.C.M. (CCH) 1497
33 14-May-2003 McCord v. Comm’r 1 120 T.C. 358 *; 2003 U.S. Tax Ct. LEXIS 16 **; 120 T.C. No. 13
34 23-Aug-2002 Okerlund v. United States 2 53 Fed. Cl. 341 *; 2002 U.S. Claims LEXIS 221 **; 2002-2 U.S. Tax Cas. (CCH) P60,447; 90 A.F.T.R.2d (RIA) 2002-6124
35 1-Aug-2002 Dunn v. Comm’r 1 301 F.3d 339 *; 2002 U.S. App. LEXIS 15453 **; 59 Fed. R. Serv. 3d (Callaghan) 529
36 17-Jun-2002 Estate of Bailey v. Comm’r 1 2002 Tax Ct. Memo LEXIS 159 *; T.C. Memo 2002-152; 83 T.C.M. (CCH) 1862; T.C.M. (RIA) 54788
37 9-Apr-2002 Estate of Mitchell v. Comm’r 1 2002 Tax Ct. Memo LEXIS 100 *; T.C. Memo 2002-98; 83 T.C.M. (CCH) 1524; T.C.M. (RIA) 54715
38 5-Feb-2002 Estate of Heck v. Comm’r 1 2002 Tax Ct. Memo LEXIS 38 *; T.C. Memo 2002-34; 83 T.C.M. (CCH) 1181; T.C.M. (RIA) 54639
39 3-Oct-2001 Estate of Elma Middleton Dailey v. Comm’r 2 2001 Tax Ct. Memo LEXIS 299 *; T.C. Memo 2001-263; 82 T.C.M. (CCH) 710
40 24-Aug-2001 Adams v. United States 1 2001 U.S. Dist. LEXIS 13092 *; 2001-2 U.S. Tax Cas. (CCH) P60,418; 88 A.F.T.R.2d (RIA) 2001-6057
41 6-Jul-2001 Estate of H.A. True v. Comm’r 9 2001 Tax Ct. Memo LEXIS 199 *; T.C. Memo 2001-167; 82 T.C.M. (CCH) 27
42 9-May-2001 Estate of Marcia P. Hoffman v. Comm’r 1 2001 Tax Ct. Memo LEXIS 136 *; T.C. Memo 2001-109; 81 T.C.M. (CCH) 1588
43 27-Mar-2001 Wall v. Comm’r 1 2001 Tax Ct. Memo LEXIS 97 *; T.C. Memo 2001-75; 81 T.C.M. (CCH) 1425
44 6-Mar-2001 Estate of Jones v. Comm’r 2 116 T.C. 121 *; 2001 U.S. Tax Ct. LEXIS 11 **; 116 T.C. No. 10; 116 T.C. No. 11
45 2-Feb-2001 Janda v. Comm’r 1 2001 Tax Ct. Memo LEXIS 34 *; T.C. Memo 2001-24; 81 T.C.M. (CCH) 1100; T.C.M. (RIA) 54231
46 30-Nov-2000 Knight v. Comm’r 1 115 T.C. 506 *; 2000 U.S. Tax Ct. LEXIS 88 **; 115 T.C. No. 36
47 18-Aug-2000 Estate of Borgatello v. Comm’r 1 2000 Tax Ct. Memo LEXIS 309 *; T.C. Memo 2000-264; 80 T.C.M. (CCH) 260; T.C.M. (RIA) 54013
48 4-Aug-2000 Godley v. Comm’r 4 2000 Tax Ct. Memo LEXIS 284 *; T.C. Memo 2000-242; 80 T.C.M. (CCH) 158; T.C.M. (RIA) 53984
49 27-Jun-2000 Estate of Klauss v. Comm’r 1 2000 Tax Ct. Memo LEXIS 228 *; T.C. Memo 2000-191; 79 T.C.M. (CCH) 2177; T.C.M. (RIA) 53923
50 11-Apr-2000 Estate of Maggos v. Comm’r 1 2000 Tax Ct. Memo LEXIS 154 *; T.C. Memo 2000-129; 79 T.C.M. (CCH) 1861
51 20-Mar-2000 Gow v. Comm’r 4 2000 Tax Ct. Memo LEXIS 108 *; T.C. Memo 2000-93; 79 T.C.M. (CCH) 1680
52 15-Feb-2000 Estate of Weinberg v. Comm’r 1 2000 Tax Ct. Memo LEXIS 58 *; T.C. Memo 2000-51; 79 T.C.M. (CCH) 1507
53 5-Nov-1999 Estate of Smith v. Comm’r 2 1999 Tax Ct. Memo LEXIS 425 *; T.C. Memo 1999-368; 78 T.C.M. (CCH) 745
54 14-Oct-1999 Estate of Marmaduke v. Comm’r 2 1999 Tax Ct. Memo LEXIS 397 *; T.C. Memo 1999-342; 78 T.C.M. (CCH) 590
55 23-Aug-1999 Estate of Hendrickson v. Comm’r 1 1999 Tax Ct. Memo LEXIS 318 *; T.C. Memo 1999-278; 78 T.C.M. (CCH) 322; T.C.M. (RIA) 99278
56 29-Jul-1999 Gross v. Comm’r 1 1999 Tax Ct. Memo LEXIS 290 *; T.C. Memo 1999-254; 78 T.C.M. (CCH) 201; T.C.M. (RIA) 99254
57 10-Mar-1999 Desmond v. Comm’r 1 1999 Tax Ct. Memo LEXIS 84 *; T.C. Memo 1999-76; 77 T.C.M. (CCH) 1529; T.C.M. (RIA) 99076
58 17-Nov-1998 Barnes v. Comm’r 2 1998 Tax Ct. Memo LEXIS 410 *; T.C. Memo 1998-413; 76 T.C.M. (CCH) 881; T.C.M. (RIA) 98413
59 8-Aug-1998 King v. Comm’r (Estate of Brookshire) 1 1998 Tax Ct. Memo LEXIS 370 *; T.C. Memo 1998-365; 76 T.C.M. (CCH) 659
60 30-Jun-1998 Estate of Davis v. Comm’r 1 110 T.C. 530 *; 1998 U.S. Tax Ct. LEXIS 35 **; 110 T.C. No. 35
61 30-Apr-1998 Furman v. Comm’r 2 1998 Tax Ct. Memo LEXIS 158 *; T.C. Memo 1998-157; 75 T.C.M. (CCH) 2206
62 19-Mar-1998 Dockery v. Comm’r 2 1998 Tax Ct. Memo LEXIS 114 *; T.C. Memo 1998-114; 75 T.C.M. (CCH) 2032
63 27-Oct-1997 Estate of Fleming v. Comm’r 1 1997 Tax Ct. Memo LEXIS 566 *; T.C. Memo 1997-484; 74 T.C.M. (CCH) 1049; 3 U.S. Tax Cas. (CCH) P45,035
64 5-Feb-1997 Gray v. Comm’r 1 1997 Tax Ct. Memo LEXIS 66 *; T.C. Memo 1997-67; 73 T.C.M. (CCH) 1940
65 26-Aug-1996 Estate of Barudin v. Comm’r 1 1996 Tax Ct. Memo LEXIS 403 *; T.C. Memo 1996-395; 72 T.C.M. (CCH) 488
66 11-Mar-1996 Kosman v. Comm’r 3 1996 Tax Ct. Memo LEXIS 107 *; T.C. Memo 1996-112; 71 T.C.M. (CCH) 2356
67 4-Dec-1995 Wheeler v. United States 1 1995 U.S. Dist. LEXIS 21432 *; 77 A.F.T.R.2d (RIA) 96-1405
68 7-Aug-1995 Estate of McCormick v. Comm’r 4 1995 Tax Ct. Memo LEXIS 367 *; T.C. Memo 1995-371; 70 T.C.M. (CCH) 318
69 12-Jun-1995 Mandelbaum v. Comm’r 1 1995 Tax Ct. Memo LEXIS 256 *; T.C. Memo 1995-255; 69 T.C.M. (CCH) 2852
70 28-Mar-1995 Estate of Frank v. Comm’r 1 1995 Tax Ct. Memo LEXIS 178 *; T.C. Memo 1995-132; 69 T.C.M. (CCH) 2255
71 27-Oct-1994 Estate of Luton v. Comm’r 2 1994 Tax Ct. Memo LEXIS 550 *; T.C. Memo 1994-539; 68 T.C.M. (CCH) 1044
72 19-Oct-1994 Estate of Lauder v. Comm’r 1 1994 Tax Ct. Memo LEXIS 535 *; T.C. Memo 1994-527; 68 T.C.M. (CCH) 985
73 11-May-1994 Estate of Simpson v. Comm’r 2 1994 Tax Ct. Memo LEXIS 217 *; T.C. Memo 1994-207; 67 T.C.M. (CCH) 2938
74 8-Dec-1993 Estate of Ford v. Comm’r 6 1993 Tax Ct. Memo LEXIS 595 *; T.C. Memo 1993-580; 66 T.C.M. (CCH) 1507
75 10-Nov-1993 Estate of Jung v. Comm’r 1 101 T.C. 412 *; 1993 U.S. Tax Ct. LEXIS 69 **; 101 T.C. No. 28
76 1-Feb-1993 Estate of Bennett v. Comm’r 1 1993 Tax Ct. Memo LEXIS 47 *; T.C. Memo 1993-34; 65 T.C.M. (CCH) 1816
77 30-Aug-1990 Estate of Murphy v. Comm’r 1 1990 Tax Ct. Memo LEXIS 520 *; T.C. Memo 1990-472; 60 T.C.M. (CCH) 645; T.C.M. (RIA) 90472
78 1-Aug-1990 Estate of Lenheim v. Comm’r 5 1990 Tax Ct. Memo LEXIS 420 *; T.C. Memo 1990-403; 60 T.C.M. (CCH) 356; T.C.M. (RIA) 90403
79 31-May-1990 Estate of Dougherty v. Comm’r 1 1990 Tax Ct. Memo LEXIS 292 *; T.C. Memo 1990-274; 59 T.C.M. (CCH) 772; T.C.M. (RIA) 90274
80 28-Feb-1990 Estate of Newhouse v. Comm’r 1 94 T.C. 193 *; 1990 U.S. Tax Ct. LEXIS 9 **; 94 T.C. No. 14
TOTAL NUMBER OF OBSERVATIONS 137

Exhibit B: Descriptive Statistics

A. Dependent Variable (DLOC)

A.1. Sample Including Controlling Stakes

N Minimum Maximum Mean Std. deviation
DLOC 137 0.00 62.87 13.79 9.27

A.2. Sample Excluding Controlling Stakes

N Minimum Maximum Mean Std. deviation
DLOC 106 3.30 62.87 16.72 7.89

B. Independent Variables

We report descriptive statistics (frequencies) for the main independent variable below. The missing information corresponds to the cases and observations for which there is no information available or for which the independent reviewers came to conflicting conclusions

Categorical variables 1 0 Missing Total (N)
Control 26 106 5 137

C. Control Variables

We report key statistics for the continuous and categorical control variables below. The missing values correspond to the observations for which the independent reviewers could not determine the value in an unequivocal way.

The regression results have been checked on the absence of multicollinearity. This situation occurs when the predictor variables are highly correlated with each other; in this case, the regression model would not be able to accurately associate variance in the outcome variable with the correct predictor variable, leading to muddled results and incorrect inferences. Multicollinearity has been checked using the variance inflation factor values (not reported).

Continuous variables N Minimum Maximum Mean Std. deviation
Company size ($M) 137 0.20 3,141.98 120.27 372.02
Size of interest (%) 133 0.12 100.00 35.84 28.63
Spread (0–200) 137 3.28 200.00 64.23 34.62
Categorical variables 1 0 Missing Total (N)
Audit 22 115 0 137
Profitable 117 14 6 137
Board 85 50 2 137
Operating 80 57 0 137
Division Industry SIC range Number of observations
A Agriculture, forestry, & fishing 01–09 7
B Mining 10–14 2
C Construction 15–17 4
D Manufacturing 20–39 14
E Transportation & public utilities 40–49 9
F Wholesale trade 50–51 5
G Retail trade 52–59 8
H Finance, insurance, & real estate 60–67 76
I Services 70–89 12
J Public administration 91–98 0
K Non classifiable establishments 99 0
TOTAL 137

Exhibit C: Impact of Control Rights on DLOC

We observe that in exceptional cases, a DLOC is applied to a controlling stake. For example, in Gray v. Commissioner (66 T.C.M. (CCH) 254 (1993)), the Tax Court applied a discount on a stake that represented 50.487 % of the voting stock of a corporation. The court pointed to the “substantial size of the minority interest and the potential for dissension and legal complications in the event of a liquidation…” (Id.).

Exhibit D: Robustness Test – Regression Results Excluding Controlling Stakes

As we have found, unsurprisingly, that control has a major impact on the DLOC, we run a separate test for all observations in which a non-controlling stake is valued (i.e., we exclude 26 observations for controlling stakes and 5 observations for which the reviewers could not unequivocally confirm that the valuation subject had 50 % or more of the control rights). The second regression is thus based on 106 observations for which we retain the same independent variables (to the exclusion of the dummy for control which makes no sense in this test).[32]

The purpose of the second exercise is twofold: first we want to check whether our conclusions hold for the non-controlling stakes only and second we want to check the R-squared of the model. We do expect a significant drop in R-squared (as we take out the controlling stakes for which we have nearly consistent zero DLOC observations as shown in Exhibit C). However, we hope to retain an acceptable R-squared for the second model with variables that remain statistically relevant. These effects will allow us to verify that the DLOC is impacted by other factors than control and that DLOC and PBC share common determinants (thus allowing us to validate our central hypothesis that the DLOC can be seen as the mirror image of the PBC and used as an alternative method to estimate their size).

Model B Std. error Beta t Sig.
Intercept 14.173 3.109 4.559 0.000
Logsize −1.177 0.440 −0.257 −2.674 0.009
% Cash flow rights −0.044 0.031 −0.139 −1.414 0.161
Audit −2.032 2.227 −0.086 −0.913 0.364
Profit 2.249 2.341 0.095 0.961 0.339
Operating 7.412 1.611 0.462 4.602 0.000
Board −2.456 1.742 −0.152 −1.410 0.162
Spread 0.052 0.021 0.234 2.446 0.016
R-squared 30.4 %
Adjusted R-squared 25.2 %

The second model confirms the decisive impact of control on the DLOC (as shown by the difference in R-squared between the two models). However, the model also shows that the DLOC is impacted by the same variables as the first model: the spread and the operating character of the company. In addition, the (log)size becomes relevant at the 5 % level. As the coefficient is difficult to interpret because of the log transformation, we find it sufficient to report a negative relationship between size and PBC, as also found by Zingales (1995), Nenova (2003) and Luo et al. (2012).

The other variables are not relevant at the 5 % level but have all the sign expected by theory. We point to the negative impact of cash flow rights on the DLOC. We believe that an increased equity stake might incentivize the shareholders to step up their monitoring efforts (a suggestion raised by Gilson and Schwartz 2012: 35). We also note that the presence of a board of directors tends to reduce the DLOC. It seems thus that, to a certain extent, minority shareholders rely on the board to counter tunneling attempts by the controlling shareholder(s).

The other variables have P-values that are far above conventional relevance levels. These statistically irrelevant items include, counterintuitively, the variable “audit” for which we have no ready explanation. Indeed, we would expect that minority shareholders rely rather on an external audit to expose possible expropriation by the controlling shareholders than on board members that are supposedly appointed by or with the implicit approval of the controlling shareholders. A possible explanation (in line with arguments set out by Dyck and Zingales 2004) is that shareholders rely rather on tax compliance and enforcement, especially in a country with a sophisticated administration such as the United States.

Exhibit E: Dealing with Selection Bias

The sample of court cases used in our study might be subject to a selection bias in that only a limited number of cases are finally decided by a court of law and that an undefined number of cases are settled before that stage.

We present below our view on this potential bias (A), implement a strategy to test whether the exclusion of settlements has an impact on our conclusions (B), and summarize our findings (C).

A. The Exclusion of Settlements is Unlikely to Have an Impact on the DLOC

The dependent variable in our regression is the Discount for Lack of Control (DLOC) applied to a minority stake in a private company. We see no obvious reason why the DLOC in a settlement would be materially different from the DLOC in a court decision.

On the contrary: the published DLOCs decided by courts are likely to be the main source of information for settlement discussions. The parties know that the alternative to a settlement is a court decision, and thus a DLOC in a settlement is presumably informed and inspired by the average DLOC decided by courts.

B. What is the Possible Impact of Excluding Settled Cases?

The expected payoff from litigation for parties depends on the amount at stake, the win probability, and the litigation cost (Hylton and Kim 2023). In other words, parties will only prefer litigation over a settlement if the expected award (payoff) justifies the cost of litigation.

We have collected metadata to estimate the cost of ligation (in particular the number of attorneys, the complexity of the case as proxied by the length of the court opinion and the time in litigation). Eventually we decided to only retain the first two elements in a truncated regression with unobserved and stochastic settlement thresholds as proposed by Hylton and Kim (2023). The Hylton & Kim model also uses these two variables and our results showed that the third variable (time in litigation) was not relevant.[33]

Regression model OLS MLE
Constant 13.487*** (2.861) 12.215*** (3.912)
Logsize −0.596 (0.363) −1.327** (0.551)
Control −15.214*** (2.001) −43.073*** (7.745)
% Cash flow rights −0.035 (0.028) −0.057 (0.038)
Audit −3.743* (1.898) −3.886 (2.610)
Profit 1.496 (2.103) 3.027 (2.796)
Operating 5.371*** (1.394) 8.341*** (2.066)
Board −1.251 (1.458) −2.248 (2.038)
Spread 0.050** (0.020) 0.060** (0.026)

  1. Standard errors in parentheses. *** p < 0.01, ** p < 0.05, * p < 0.1.

The maximum likelihood estimation (MLE) regression results allow us to confirm the impact of the operating character and the spread on the DLOC. We note that in this model, the size of the effect is even accentuated. Interestingly, we note that the (log)size of the company becomes significant and that there is a clear and important negative relation between the size of the company and the DLOC (see also the results of the robustness check presented in Exhibit D). All coefficients in the MLE model retain the positive or negative sign predicted by theory.

C. Conclusions

We acknowledge the concern that court decisions by definition are limited to cases that fail to settle at some point in the dispute resolution process.

In the case of our dataset and research question, we believe that this concern is mitigated by the nature of our dependent variable, being a percentage discount for which settled cases are most likely informed and inspired by court decisions.

Additionally, we applied the methodology proposed by Hylton and Kim (2023) to verify whether a maximum likelihood estimation (MLE) regression would lead to different results. This is not the case. The MLE coefficients confirm the conclusions of our paper. Indeed, we note that the same variables remain relevant, thus allowing us to confirm the interpretation and conclusions we set out in the body of our text.

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Received: 2024-03-27
Accepted: 2024-11-15
Published Online: 2025-03-17

© 2025 Walter de Gruyter GmbH, Berlin/Boston

Artikel in diesem Heft

  1. Frontmatter
  2. Editorial
  3. Laudatio: Christoph Engel
  4. Articles
  5. Pre-Emptive Rights – A Theoretical and Empirical Examination
  6. The Value of Control in Private Companies
  7. The Direct Incidence of Product Liability on Wages
  8. The Hard Pursuit of Optimal Vaccination Compliance in Heterogeneous Populations
  9. Revival Churches Abuses and Well-Being in Cameroon
https://doi.org/10.1515/rle-2024-0047
Schlagwörter für diesen Artikel
private benefits of control; discount; valuation; private companies; DLOC

Artikel in diesem Heft

  1. Frontmatter
  2. Editorial
  3. Laudatio: Christoph Engel
  4. Articles
  5. Pre-Emptive Rights – A Theoretical and Empirical Examination
  6. The Value of Control in Private Companies
  7. The Direct Incidence of Product Liability on Wages
  8. The Hard Pursuit of Optimal Vaccination Compliance in Heterogeneous Populations
  9. Revival Churches Abuses and Well-Being in Cameroon
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