How much value can blockholders tunnel? Evidence from the Bulgarian mass privatization auctions

This study examines the emergence of the Bulgarian stock market and the role of controlling blockholders. A new approach using mass privatization auction data measures the premium for control and demonstrates that, in the absence of legal constraints, majority owners extract more than 85% of firm value as private benefits of control. Institutional investors form portfolios of predominantly controlling positions or participate in majority coalitions. Ownership stakes cluster at 51%. After the privatized companies begin trading on the Bulgarian Stock Exchange, majority-owned firms trade at 40-60% discounts. Overall, the results support the Fama and Jensen (J. law Ecorg 26 (1983) 301) view that majority-owned firms cannot persist as publicly traded corporations if the expropriating activities of controlling blockholders are not legally restricted. (c) 2004 Elsevier B.V. All rights reserved.