“When members of the business-valuation community use restricted-stock evidence, they engage in financial economics, albeit bad financial economics,” says Robert Comment, Ph.D., in response to our continuing report on the FMV Restricted Stock Study. “The valuation world is not entitled to its own version of financial economics.” Look for a new article by Comment, "Revisiting the Illiquidity Discount for Private Companies: A New (and ‘Skeptical’) Restricted-Stock Study," in the Journal of Applied Corporate Finance, Vol. 24, No.1 (Winter 2012), which should be out in a few weeks.

On the other side, Terry Lloyd (FSG) points out numerous “failures” in the critique of the restricted stock data. “Intelligent users will always take guidance from where appropriate to assist them in measuring certain features of illiquid interests,” Lloyd says. “Unless and until there is a larger database with transactions specific to my particular situation (industry, size, etc.), I will use the best tool available to me to help estimate that feature of the interest I am appraising. That sometimes includes the FMV database, and sometimes it does not. As in so many areas, the tool is no more useful than the skill of the practitioner applying it,” Lloyd adds. “Judgment is an attribute of any profession, including [business] appraisal. I have found the FMV database to be useful to me on more than one occasion. The information taken from there is not dispositive but can provide guidance not found in other sources,” particularly in its feature that allows the data to be sorted by industry, size, and date.

As for the allegations that “risky firms” in the dataset make it inapplicable for measuring illiquidity, Lloyd has two comments. “First, this is a straw man argument. The valuation of the enterprise would include the riskiness of the specific firm and its industry. The FMV data are used to measure illiquidity using the relative pricing of liquid-versus-illiquid shares and are not used (to my knowledge) for other things,” Lloyd says. Second, “most appraisers deal with risk separately, but confusing the two (risk factors and liquidity) would be the appraiser’s mistake and not a limitation of the data in the study.”