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The FASB goes on to add that determining the discount
requires the analyst’s judgment.
Valuing Restricted Stock
Aswenotedearlier,therearegenerallythreemodificationsto
restricted stock that can affect value. The first is the
employmentrestriction.Sincerestrictedstockvestswiththe
employeeonlyifheorsheremainsemployedbythefirm,the
greater the likelihood of employment termination, the less
valuable restricted stock will become. Adjusting for this
factorrequiresanestimateoftheprobabilitythatanemployee
willstayemployedbythefirmduringtherestrictionperiod,
and that probability is then multiplied by the stock price
today.
The most common version of restricted stock prevents
employeesfromtradingthestockforaspecifiednumberof
yearsaftertheyhavebeengrantedthestock.Thus,restricted
stockisilliquidrelativetootherstock,andshouldtradeata
discount on the observed market price. How much of a
discount? That will depend on several factors:
1.Periodofilliquidity.Thelongerthenontradingrestriction
period, the larger the illiquidity discount should be for
restrictedstock.Toprovideasenseofthemagnitudeofthe
discount,notethatfirmsthatraisefundsthroughtheissueof
restricted stock to investors (as opposed to using it as
managementcompensation)typicallyacceptdiscountsof 20
to 30 percent on the market price.