andsold. Thevalueof thesefirms isnotreported,and the
illiquiditydiscountisthedifferencebetweenthevalueandthe
price.Inthissection,weconsiderfourapproachesthatarein
use—a fixed discount (with marginal and subjective
adjustments forindividualfirmdifferences),a firm-specific
discountbasedonafirm’scharacteristics,adiscountobtained
byestimatingasyntheticbid-askspreadforanasset,andan
option-based illiquidity discount.
Fixed Discount
Thestandardpracticeinmanyprivatecompanyvaluationsis
eitherto useafixedilliquiditydiscountforallfirms or,at
best, to have a rangefor the discount,with the analyst’s
subjective judgment determining where in the range a
particularcompany’sdiscountshouldfall.Theevidencefor
thispracticecanbeseenbothinthehandbooksmostwidely
used in private company valuation and in thecourt cases
wherethesevaluationsareoftencited.Thegenesisforthese
fixeddiscountsseemstobeintheearlystudiesofrestricted
stockthatwenotedinthelastsection.Thesestudies found
that restricted (and therefore illiquid) stocks traded at
discounts of 25 to 35 percent,relative totheir unrestricted
counterparts, and private company appraisers have used
discounts of the same magnitude in their valuations.
64 Sincemanyofthesevaluationsarefortaxcourt,wecan
seethetrailofrestrictedstock–baseddiscountslitteringthe
footnotes of dozens of cases in the past three decades.
65
Aswenotedintheprevioussection,someresearchershave
argued that these discounts are too large because of the
samplingbiasinherentinusingrestrictedstockandthatthey