whom equity is privately placed may be providing other
services to the firm, for which the discount is compensation.
One way of isolating the service difference would be to
compareunregisteredprivateplacements,whichrepresentthe
restricted stock issues,to registered private placements of
equitybycompanies.Sinceonlytheformerhaverestrictions
onmarketability,thedifferenceindiscountsbetweenthetwo
maybea bettermeasure oftheilliquiditydiscount.Wruck
(1989)madethis comparisonandestimateda differenceof
17.6percentinaveragediscountsandonly10.4percentinthe
median discount between the two types of placements.
50 HertzelandSmith(1993)expandedonthiscomparisonof
restrictedstockandregisteredprivateplacementsbylooking
at 106 private placements of equity from 1980 to 1987.
51 Theyconcludedthatwhilethemediandiscountacrossall
privateplacementswas13.26percent,thediscountwas13.5
percenthigherforrestrictedstockthanforregisteredstock.
Bajaj,Dennis,Ferris,andSarin(2001)lookedat 88 private
placementsfrom 1990 to 1997 andreportmediandiscountsof
9.85 percent for registered private placements and 28.13
percentforrestrictedstocks.Aftercontrollingfordifferences
acrossthefirmsmakingtheseissues,theyattributeonly7.23
percent to the marketability discount.
52
It should be noted that these studies also pinpoint the
selectionbiasinherentinfocusingonfirmsthatmakeprivate
placements. Hertzel and Smith (1993; see above)compare
firms making private placements to those making public
issuesandnotethatfirmsmakingprivateplacementstendto
besmallerandriskierthanotherfirms,andareusuallylisted
ontheover-the-counter(OTC)market.Manyofthesefirms