Discount for lack of marketability in company valuation

Abstract

The degree of security’s liquidity can vary greatly, from everyday trading activity on the open market to trading restrictions for a specified period of time. In case when securities can’t be traded in the right moment, shareholder bears additional risk and costs because he is not able to react properly to sudden market changes. Such risk should be offset by a discount on a price of liquid security. Stocks of closely held companies are not listed on the stock market, in this case they characterized by less liquidity than socks of public companies. To estimate fair value of closely held company the correct discount should be applied to the base evaluation. The main point of discussion of following article concerns analysis of academic literature, devoted to measuring discounts for lack of marketability.