Discounts on Restricted Stock: The Impact of Illiquidity on Stock Prices

A simple statistical model explains price differences between securities that differ in resale provisions-in particular, restricted securities, which can be sold only after a two-year holding period, are compared with publicly traded securities of the same company. The discount on restricted stock varies directly with the amount of restricted stock relative to publicly traded stock and inversely with the credit-worthiness of the issuing company. That credit-worthy companies must offer price discounts of more than 30 per cent to sell a significant block of restricted stock illustrates the importance of liquidity to the valuation of common stock.