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Illiquidity discounts depend on the length of the trading restriction period. Existing theoretical restricted stock discount models are adapted to situations in which the trading restriction period has a well-defined fixed length. In many scenarios, the private equity investor faces a liquidity horizon that may be random or indefinite rather than of known fixed length. Stillian Ghaidarov will review a simple and robust methodology that allows us to extend the use of restricted stock discount models to scenarios in which the trading restriction period is random or indefinite.
Program Agenda
What are the fundamental properties of any sound illiquidity discount model?
How can we apply such models in situations when the liquidity horizon is indefinite, or seemingly perpetual?
How can we apply such models in situations when the liquidity horizon is random or follows some unknown probability distribution?
Review of several numerical examples/applications.
Learning Objectives
Apply restricted stock discount models to situations when the restriction period appears to be perpetual;
Describe how to apply restricted stock discount models to situations when the restriction period appears to be random or following an unknown probability distribution; and
Quantify the impact of dividend distributions on the illiquidity discount.
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