How Much Can Marketability Affect Security Values?



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    • The Anderson Graduate School of Management, UCLA. I am grateful for the comments of Michael Brennan, Julian Franks, Mark Grinblatt, Eduardo Schwartz, Jean-Luc Vila, and Pradeep Yadav and seminar participants at the American Stock Exchange (AMEX) Options Colloquium, Case Western Reserve University, the London School of Business, McGill University, the University of Strathclyde, the University of Toronto, and the University of Vienna. I am particularly grateful for the comments and suggestions of René Stulz and an anonymous referee. All errors are my responsibility.


How marketability affects security prices is one of the most important issues in finance. We derive a simple analytical upper bound on the value of marketability using option-pricing theory. We show that discounts for lack of marketability can potentially be large even when the illiquidity period is very short. This analysis also provides a benchmark for assessing the potential costs of exchange rules and regulatory requirements restricting the ability of investors to trade when desired. Furthermore, these results provide new insights into the relation between discounts for lack of marketability and the length of the marketability restriction.