Hostname: page-component-7b7567c8c-wxvwp Total loading time: 0 Render date: 2026-11-15T01:22:14.700Z Has data issue: false hasContentIssue false
  • English
  • Français

Discounting Restricted Securities

Published online by Cambridge University Press:  15 August 2022

Tarik UmarOpen the ORCID record for Tarik Umar[Opens in a new window],
Emmanuel Yimfor and
Rustam Zufarov
Tarik Umar*
Affiliation:
Rice University Jones Graduate School of Business
Emmanuel Yimfor
Affiliation:
University of Michigan Ross School of Business eyimfor@umich.edu
Rustam Zufarov
Affiliation:
University of Illinois at Chicago College of Business Administration zufarov@uic.edu
*
tarik.umar@rice.edu (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the 'Save PDF' action button.

We examine the costs of trading restrictions by exploiting an SEC rule change eliminating an approximately 80-day restriction period in private placements for small issuers. Using a difference-in-differences specification, we find that the restriction is binding, as dollar volume increases 19 percentage points vis-à-vis proceeds, and costly, as offering discounts fall by 8 percentage points. Discounts fall more for issuers with higher information asymmetry or longer restriction periods. We account for endogenous responses to the rule change. Overall, our findings suggest that trading restrictions are costly and have large effects on firms’ cost of capital.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 1 , February 2023, pp. 419 - 448
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank conference participants at the 2019 Lone Star Conference (discussant Praveen Kumar), the 2020 International Conference on Derivatives and Capital Markets (discussant Anastasios Kagkadis), the 2020 FMA (discussant Ke Yang), the 2020 SWFA (discussant Tim Park), the 2020 IFA, and the 28th SFM, and seminar participants at Rice University. This article benefited from feedback from Alan Crane, Kevin Crotty, Ioannis Floros, Matthew Gustafson, Peter Iliev, Francis Longstaff, Shiva Sivaramakrishnan, and James Weston.

References

Amihud, Y., and Mendelson, H.. “Liquidity, Maturity, and the Yields on U.S. Treasury Securities.” Journal of Finance, 46 (1991), 1411–1425.CrossRefGoogle Scholar
Bharath, S. T., and Shumway, T.. “Forecasting Default with the Merton Distance to Default Model.” Review of Financial Studies, 21 (2008), 1339–1369.CrossRefGoogle Scholar
Billett, M. T.; Floros, I. V.; and Garfinkel, J. A.. “At-the-Market Offerings.” Journal of Financial and Quantitative Analysis, 54 (2019), 1263–1283.CrossRefGoogle Scholar
Booth, J. R., and Smith, R. L. II. “Capital Raising, Underwriting and the Certification Hypothesis.” Journal of Financial Economics, 15 (1986), 261–281.CrossRefGoogle Scholar
Bortolotti, B.; Megginson, W.; and Smart, S. B.. “The Rise of Accelerated Seasoned Equity Underwritings.” Journal of Applied Corporate Finance, 20 (2008), 35–57.CrossRefGoogle Scholar
Brenner, M.; Eldor, R.; and Hauser, S.. “The Price of Options Illiquidity.” Journal of Finance, 56 (2001), 789–805.CrossRefGoogle Scholar
Brophy, D. J.; Ouimet, P. P.; and Sialm, C.. “Hedge Funds as Investors of Last Resort?” Review of Financial Studies, 22 (2009), 541–574.CrossRefGoogle Scholar
Chan, K.; Menkveld, A. J.; and Yang, Z.. “Information Asymmetry and Asset Prices: Evidence from the China Foreign Share Discount.” Journal of Finance, 63 (2008), 159–196.CrossRefGoogle Scholar
Chemmanur, T. J., and Fulghieri, P.. “Investment Bank Reputation, Information Production, and Financial Intermediation.” Journal of Finance, 49 (1994), 57–79.CrossRefGoogle Scholar
Chen, Z., and Xiong, P.. “Discounts on Illiquid Stock: Evidence from China.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=286169 (2001).CrossRefGoogle Scholar
Corwin, S. A. “The Determinants of Underpricing for Seasoned Equity Offers.” Journal of Finance, 58 (2003), 2249–2279.CrossRefGoogle Scholar
Dresner, S., and Kim, E. K.. PIPEs: A Guide to Private Investments in Public Equity. New York, NY: Bloomberg Press (2010).Google Scholar
Emory, J. D. “The Value of Marketability as Illustrated in Initial Public Offerings of Common Stock.” Business Valuation Review, 16 (1997), 123–131.CrossRefGoogle Scholar
Field, L. C., and Hanka, G.. “The Expiration of IPO Share Lockups.” Journal of Finance, 56 (2001), 471–500.CrossRefGoogle Scholar
Finnerty, J. D. “An Average-Strike Put Option Model of the Marketability Discount.” The Journal of Derivatives, 19 (2012), 53–69.CrossRefGoogle Scholar
Gao, X., and Ritter, J. R.. “The Marketing of Seasoned Equity Offerings.” Journal of Financial Economics, 97 (2010), 33–52.CrossRefGoogle Scholar
Gomes, A., and Phillips, G.. “Why Do Public Firms Issue Private and Public Securities?” Journal of Financial Intermediation, 21 (2012), 619–658.CrossRefGoogle Scholar
Gustafson, M., and Iliev, P.. “The Effects of Removing Barriers to Equity Issuance.” Journal of Financial Economics, 124 (2017), 580–598.CrossRefGoogle Scholar
Hall, B. J., and Murphy, K. J.. “Stock Options for Undiversified Executives.” Journal of Accounting and Economics, 33 (2002), 3–42.CrossRefGoogle Scholar
Hertzel, M., and Smith, R. L.. “Market Discounts and Shareholder Gains for Placing Equity Privately.” Journal of Finance, 48 (1993), 459–485.CrossRefGoogle Scholar
Hertzel, M. G.; Huson, M. R.; and Parrino, R.. “Public Market Staging: The Timing of Capital Infusions in Newly Public Firms.” Journal of Financial Economics, 106 (2012), 72–90.CrossRefGoogle Scholar
Iliev, P., and Lowry, M.. “Venturing Beyond the IPO: Financing of Newly Public Firms by Venture Capitalists.” Journal of Finance, 75 (2020), 1527–1577.CrossRefGoogle Scholar
Johnson, R. D., and Racette, G. A.. “Discounts on Letter Stock Do not Appear to Be a Good Base on Which to Estimate Discounts for Lack of Marketability on Closely Held Stocks.” Taxes, 59 (1981), 574–581.Google Scholar
Kahl, M.; Liu, J.; and Longstaff, F. A.. “Paper Millionaires: How Valuable is Stock to a Stockholder Who is Restricted from Selling It?” Journal of Financial Economics, 67 (2003), 385–410.CrossRefGoogle Scholar
Kumar, R., and Shome, D. K.. “The Revival of Shelf-Registered Corporate Equity Offerings.” Journal of Corporate Finance, 14 (2008), 32–50.Google Scholar
Lim, J.; Schwert, M.; and Weisbach, M. S.. “The Economics of PIPEs.” Journal of Financial Intermediation, 45 (2019), 100832.CrossRefGoogle Scholar
Ljungqvist, A., and Richardson, M.. “The Cashflow, Return and Risk Characteristics of Private Equity.” NBER Working Paper No. 9454 (2003).CrossRefGoogle Scholar
Longstaff, F. A. “How Much Can Marketability Affect Security Values?” Journal of Finance, 50 (1995), 1767–1774.CrossRefGoogle Scholar
Longstaff, F. A. “Optimal Portfolio Choice and the Valuation of Illiquid Securities.” Review of Financial Studies, 14 (2001), 407–431.CrossRefGoogle Scholar
Longstaff, F. A. “Portfolio Claustrophobia: Asset Pricing in Markets with Illiquid Assets.” American Economic Review, 99 (2009), 1119–1144.CrossRefGoogle Scholar
Longstaff, F. A. “Valuing Thinly Traded Assets.” Management Science, 64 (2018), 3868–3878.CrossRefGoogle Scholar
Lowry, M.; Michaely, R.; and Volkova, E.. “Initial Public Offerings: A Synthesis of the Literature and Directions for Future Research.” Foundations and Trends in Finance, 11 (2017), 154–320.CrossRefGoogle Scholar
Silber, W. L. “Discounts on Restricted Stock: The Impact of Illiquidity on Stock Prices.” Financial Analysts Journal, 47 (1991), 60–64.CrossRefGoogle Scholar
Strebulaev, I. “Liquidity and Asset Pricing: Evidence from the US Treasuries Market.” Working Paper, Stanford University (2002).CrossRefGoogle Scholar
Wruck, K. H. “Equity Ownership Concentration and Firm Value: Evidence from Private Equity Financings.” Journal of Financial Economics, 23 (1989), 3–28.CrossRefGoogle Scholar
Wruck, K. H., and Wu, Y.. “Relationships, Corporate Governance, and Performance: Evidence from Private Placements of Common Stock.” Journal of Corporate Finance, 15 (2009), 30–47.CrossRefGoogle Scholar
Supplementary material: PDF

Umar et al. supplementary material

Online Appendix

Download Umar et al. supplementary material(PDF)
PDF 928.2 KB