The Impact of Stock Transfer Restrictions on the Private Placement Discount
The author would like to thank Bill Christie (Editor), an anonymous referee, Larry Darby, Esq., Carl Felsenfeld, Esq., Wenxuan Hou, Peter Jurkat, Susan Long, Francis Longstaff, Haim Mozes, Gordon Phillips, Richard Smith, and Larry Thibodeau for helpful comments on earlier drafts and Jack Chen, Sherry Chen, Ernie de Rosa, Pablo Alfaro, Dina DiCenso, Elpida Tzilianos, Peter Eschmann, Alberto Chang, and Xiaoling Wang for research assistance. Financial support was provided by a summer research grant from the Fordham University Graduate School of Business. Earlier versions of the paper were presented at the annual meetings of the American Finance Association, the Financial Management Association, and the Southern Finance Association.
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.