“I think this debate is intelligible only within the BV bubble, where it is traditionally but naively assumed (apparently even by the IRS) that restricted-stock discounts are solely attributable to the regulatory restriction on marketability,” Comment says. The tradition dates back to the SEC's Institutional Investor Study, when issuers could only privately place restricted stock. “To my knowledge, nobody outside the BV bubble still relies on this naive and transparently false assumption,” he adds, which cannot survive the fact that “private placements of free-trading shares are also sold at a discount, on average.” In fact, Comment’s recent paper, "A Skeptical Restricted-Stock Study," concludes that the regulatory restriction is not even the primary cause of restricted stock discounts, nor is it significantly (statistically) different from the DLOM on the riskless asset, which approximates 2.5%.
“In a nutshell, the average discount in a sample of private placements of restricted stock is a naive, biased, and unreliable measure of the DLOM,” Comment maintains. “This is true even in a sample that is selected to be comparable to the subject company. Based on evidence from my ‘skeptical’ restricted-stock study, the DLOM is not reliably different from 2.5%."
Read more of Dr. Comment’s response—including the “proper” regression analysis to use when measuring DLOM data—in an upcoming Business Valuation Update.