What is Firm's Control?

Controlling a firm means the ability to influence the firm through making important decisions in the firm. For example - the controlling owner of the firm can decide who will be the firm's manager, where the company's offices will be located, what car he will drive, what his salary will be or how many dividends the shareholders will receive.

In other words, control of a firm is an asset that has value.

Think - what is more worth 50% of the shares of a firm that earns $1 million a year, and that the shareholder can decide how many dividends he will receive each year, or 50% of the shares of a firm that earns $1 million a year, and that the shareholder cannot decide how many dividends he will receive each year. Obviously, the first option is worth more. The question is, how much more? The answer is control premium.

Alternatively - the second option is worth less. The question is, how much less? The answer to the question is the Discount for Lack of Control (DLOC)

The Discount for Lack of Control (DLOC)

A discount for lack of control is a decrease in the value of a firm's stock due to a shareholder's inability to exercise control over the company.

Numerical Example of the DLOC

If the value of 100% of the stocks is 1,000,000 USD, and a stockholder holds 35% of the shares - he has an investment worth - 350,000 USD.

According to the DLOC theory, a discount must be deduced since he doesn't have control over the firm.

Suppose also that the DLOC equals 10%. 

His holding is therefore equals to 315,000 USD (350,000 * (1-0.1)).

Conclusion

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