Liquidity discounts: measuring the cost of buyer’s remorse

BVWireIssue #55-4
April 25, 2007

“Minority interests in private companies have not benefited from the increased liquidity in the public markets,” says Ashok Abbot, Ph.D. (West Virginia University).  “Consequently, the value difference between closely held minority interests and their publicly traded counterparts has widened in recent years.”

But the SEC and restricted stock studies—the empirical basis for development of marketability discounts, “covered larger publicly traded firms during years in which the public markets were less liquid,” Abbot says.  Thus the studies may understate the actual discount for lack of marketability and ignore the potential liquidity discount, especially for smaller firms.

The concepts are aligned but distinct: While marketability generally refers to the salability of an asset, liquidity connotes how readily (and completely) you can convert it into cash.  Or as noted NYU Professor Aswath Damodaran puts it, the cost of illiquidity is the cost of buyer’s remorse, “where you want to reverse your decision and sell [the stock] you just bought.”   His recent study, Marketability and Value: Measuring the Illiquidity Discount, is just one of many resources that registrants will receive for today’s telephone conference: Defining, Measuring & Defending Discounts for Lack of Liquidity, featuring Professor Abbott along with panelists Shannon Pratt and Rob Schlegel.  The conference begins at 1:30 p.m. EDT; there’s still time to register here.

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