auctionand privateplacementpricesoftheRISsharesand
conclude that the discount on the latter is 78 percent for
auctions and almost 86 percent for private placements.
56 Thisastoundinglyhighdiscount,whichtheyattributedto
illiquidity,doesvaryacrossfirms,withsmallerdiscountsat
larger,lessvolatilefirms.Inadifferentvein,researchershave
comparedthestockpricesofclassAandclassBsharesof
Chinese companies. The formerare open only to Chinese
investors,whereasthelattercanbeboughtbybothdomestic
andforeigninvestors.Whiletheybothofferthesameclaims
on the cash flows, class B shares trade at a significant
discountonclassAshares.Thedifferences,though,seemto
be onlypartiallyattributableto differences inliquidityand
seem more due to differential information.
57
Options and Futures
Asderivativesecurities,thevaluesofoptionsandfuturesare
boundtotheirunderlyingassetsbyarbitragerestrictions.The
effect ofilliquidity onoptionsand futures valueshasbeen
studied in two contexts. The first is when the derivative
securities are illiquid but the underlying asset is liquid.
Brenner, Eldor, and Hauser (2001) studied nontraded
currencyoptionsandconcludedthattheytradedatadiscount
of approximately 21 percent relative to otherwise similar
liquid options.
58 This issueis ofparticularrelevance inthe valuationof
employeestockoptionsthatareofferedascompensationat
publicly traded companies. Since the options cannot be
traded,thereisevidencethatemployeeswilloftenexercise
optionswellbeforetheyexpireinordertogainaccesstothe
tradable underlying stock.