“Previous work on Rule 144 stock derived an upper bound on the value of the marketability option by modeling it as a put on the maximum stock price over the restriction period,” says the abstract to a new article by John Finnerty (Finnerty Economic Consulting), just published by The Journal of Derivatives. “But an investor would require perfect foresight to actually attain that upper bound.”
In his article “An Average-Strike Put Option Model of the Marketability Discount,” Finnerty argues that “a better assumption is that the investor has no special timing ability, so the option to sell should be closer to a put on the average price.” In using this model, Finnerty finds that it tends to understate the observed marketability discount, but the theoretical option value is highly significant in regressions on the discount in over 200 private placements. To access the complete article, click here (subscription or single purchase required).
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