Private Benefits of Control: An International Comparison

TLDR

The study analyzes which institutions curb private benefits of control and offers an explanation for this effect. We construct a measure of private benefits of control in 39 countries based on 412 control transactions between 1990 and 2000. Private benefits of control vary widely, averaging 14%, and are higher in countries with less developed capital markets, concentrated ownership, and fewer public offerings; strong minority protection, law enforcement, press diffusion, tax compliance, and competition reduce these benefits, with newspapers' circulation and tax compliance being the most influential factors.

Abstract

We construct a measure of the private benefits of control in 39 countries based on 412 control transactions between 1990 and 2000. We find that the value of control ranges between -4% and +65%, with an average of 14 percent. As predicted by theory, in countries where private benefits of control are larger capital markets are less developed, ownership is more concentrated, and privatizations are less likely to take place as public offerings. We also analyze what institutions are most important in curbing these private benefits. A high degree of statutory protection of minority shareholders and high degree of law enforcement are associated with lower levels of private benefits of control, but so are a high level of diffusion of the press, a high rate of tax compliance, and a high degree of product market competition. A crude R-squared test suggests that the "non traditional" mechanisms have at least as much explanatory power as the legal ones commonly mentioned in the literature. In fact, in a multivariate analysis newspapers' circulation and tax compliance seem to be the dominating factors. We advance an explanation why this might be the case.