The Impact of Transfer Restrictions on Stock Prices

Abstract

This paper investigates the factors responsible for the discount when unregistered shares of common stock are privately placed based on a sample of 101 private placements of letter stock. The discount depends in part on the stock's volatility, the length of the restriction period, the riskless rate, and the stock's dividend yield, which are consistent with the traditional view that Rule 144 transfer restrictions are responsible for the discount. But it also reflects the information and equity ownership concentration effects that accompany private stock placements, which are cited as the main reasons for the discount in more recent studies. Thus, both sets of factors are important. I also show that the appropriate discount is smaller for relatively low-volatility stocks than the range of marketability discounts investment bankers and stock appraisers usually assume.