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The Impact of Stock Transfer Restrictions on the Private Placement Discount
Author(s) -
Finnerty John D.
Publication year - 2013
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/fima.12003
Subject(s) - private placement , equity (law) , private information retrieval , stock (firearms) , monetary economics , economics , business , private equity , private investment in public equity , microeconomics , private equity fund , finance , mechanical engineering , statistics , investment banking , law , engineering , mathematics , political science
The literature contains four explanations for the private placement discount. I find that all four contribute to the discount: loss of option value due to transfer restrictions, equity ownership concentration, information gathering, and overvaluation and expected underperformance post‐issue. An average‐strike put option model calculates marketability discounts that are consistent with empirical private placement discounts when observed discounts are adjusted for equity ownership concentration, information, and overvaluation effects. In contrast to the positive signaling effect of traditional private placement announcements, there is a negative signaling effect for private investments in public equity when the firm commits to register the shares promptly.