There are clearly dangers associated with extending a
regression run on a small number of restricted stocks to
estimatediscounts for private firms,but itdoes provideat
least a road map for adjusting discount factors.
Private Placements
Just as Silber considered fundamental factors that cause
restrictedstock discounts to vary acrossfirms, Bajaj etal.
(referenced earlier)considered various fundamental factors
thatmaycauseilliquiditydiscounts tovary acrossfirmsin
private placements. Theirregression, run across 88 private
placements between 1990 and 1995, is summarized here:
where
DISC = Discount on the market price
SHISS = Private placement as percent of outstanding shares
Z = Altman Z-Score (for distress)
DREG = 1 if registered; 0 if unregistered (restricted stock)
SDEV = Standard deviation of returns
Otherthingsremainingequal,thediscountislargerforlarger
private placements (asa percent of outstanding stocks) by
risky and distressed firms and smaller for safer firms. As
notedbefore,thediscountislargerforrestrictedstockthan
for registered stock. Hertzel and Smith (also referenced