prevailing market price, which is observable, and the
differencecanbe viewedas adiscount forilliquidity. The
resultsoftwooftheearliestandmostquotedstudiesthathave
looked at the magnitude of this discount are summarized here:
- Maher (1976) examined restricted stock purchases
madebyfourmutualfundsintheperiod1969–1973
andconcludedthattheytradedatanaveragediscount
of35.43percentonpubliclytradedstockinthesame
companies.
47 - Silber(1991)examinedrestrictedstockissuesfrom
1981 to 1988 andfoundthatthemediandiscountfor
restricted stock is 33.75 percent.
48 He also noted that thediscount was larger for
smallerandlesshealthyfirmsandforbiggerblocks
of shares.
Otherstudiesconfirmthesefindingsofasubstantialdiscount,
with discounts ranging from 30 to 35 percent. One recent
studybyJohnson (1999)did finda smallerdiscountof 20
percent.
49
These studies of restricted stock have been used by
practitionerstojustifylargemarketabilitydiscounts,butthere
arereasonstobeskeptical.First,thesestudiesarebasedon
smallsamplesizes,spreadoutoverlongtimeperiods,andthe
standarderrorsintheestimatesaresubstantial.Second,most
firmsdonotmakerestrictedstockissues,andthefirmsthat
do make these issuestend to be smaller, riskier,and less
healthy than the typical firm. This selection bias may be
skewing the observed discount. Third, the investors with