Firm Value and Marketability Discounts

Abstract

The marketability of an asset refers to the degree to which an asset can be converted to cash quickly, without incurring large transactions costs or price concessions. All else equal, the more marketable an asset, the higher the price an investor will be willing to pay for the asset. The lack of marketability of an asset is costly to investors because it potentially causes the investor to miss opportunities to allocate capital to alternative uses, such as liquidity or portfolio rebalancing.

In this article we review and critique the various methods that appear in the literature and are used in practice to estimate valuation discounts when an asset lacks marketability. We also present findings from our own original empirical research which offer further insights into the estimation of such discounts.

Keywords: Marketability discount, valuation, liquidity discount

JEL Classification: G30