Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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asapercentoffirmvalue,willbegreaterformorevolatile
assets and willincrease with the length of the period for
which trading is restricted.


COST OF ILLIQUIDITY: EMPIRICAL EVIDENCE


Ifweacceptthepropositionthatilliquidityhasacost,thenext
questionsbecomeempiricalones.Howbigisthiscost?What
causesittovaryacrosstimeandacrossassets?Theevidence
ontheprevalenceandthecostofilliquidityisspreadovera
number of asset classes. In this section, we begin by
considering the price attached to illiquidity in the bond
marketandthenmoveontotheequitymarket.Inthefinal
partofthesection,welookattheilliquidityeffectsonprivate
equity investments and real assets.


Bonds


Therearewidedifferencesinliquidityacrossbondsissuedby
differententities,and acrossmaturitiesforbondsissued by
the sameentity. These differences in liquidity offer usan
opportunitytoexaminewhetherinvestorspriceliquidityand
ifso,howmuch,bycomparingtheyieldsofliquidbondswith
otherwise similar illiquid bonds. Studies of bond market
liquidityhavelookedattheTreasurybond,corporate bond,
and subordinated bond markets.



  • Treasurybills/bonds.AmihudandMendelson(1991)
    comparedtheyieldsonTreasurybondswithlessthan
    sixmonths lefttomaturitywith Treasurybillsthat
    have the same maturity.
    34 Theyconcluded thattheyieldonthelessliquid
    Treasury bond was 0.43 percent higher on an

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