Risk, Illiquidity or Marketability: What Matters for Discounts on Private Equity Placements?

39 Pages Posted: 12 Oct 2015

See all articles by Linda H. Chen

Linda H. Chen

University of Idaho

Edward Alexander Dyl

University of Arizona

George J. Jiang

Washington State University

Januj Juneja

San Diego State University-College of Business Administration

Date Written: December 2014

Abstract

Using a clean sample of private equity placements over the period of 1999 to 2012, we examine the effects of trading restrictions on the discounts on private placements. Classifying various determinants into three categories, namely risk, illiquidity, and marketability, we show that risk and marketability are significant determinants of the discount on private placements over the entire sample period. However, we identify a structural break in the relation between the discount on private placements with illiquidity and, to a lesser degree, marketability. Specifically, we find that liquidity is a more important determinant during the pre-2003 period, but marketability becomes a more important determinant during the post-2003 period. We attribute the structural break to substantial changes in market microstructure during our sample period. Lower transaction costs make illiquidity less of a concern for investors, whereas more active trading by investors calls for a higher discount for the lack of marketability.

Keywords: Private equity placement; Trading restriction; Discount; Risk; Illiquidity; Marketability

JEL Classification: G10, G12, G23

Suggested Citation

Chen, Linda H. and Dyl, Edward A. and Jiang, George and Juneja, Januj, Risk, Illiquidity or Marketability: What Matters for Discounts on Private Equity Placements? (December 2014). Journal of Banking and Finance, Vol. 57, 2015, Available at SSRN: https://ssrn.com/abstract=2672657

Linda H. Chen

University of Idaho ( email )

Department of Accounting
College of Business and Economics
Moscow, ID 83944-3174
United States

Edward A. Dyl

University of Arizona ( email )

Department of Finance
Tucson, AZ 85721
United States
520-621-9534 (Phone)
520-621-1261 (Fax)

George Jiang (Contact Author)

Washington State University ( email )

Department of Finance and Management Science
Carson College of Business
Pullman, WA 99-4746164
United States
509-3354474 (Phone)

HOME PAGE: http://directory.business.wsu.edu/bio.html?username=george.jiang

Januj Juneja

San Diego State University-College of Business Administration ( email )

5500 Campanile Drive
San Diego, CA 92108
United States
619 594 8397 (Phone)
619 594 3272 (Fax)

HOME PAGE: http://www-rohan.sdsu.edu/~cba/facdev/juneja.html

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
187
Abstract Views
773
rank
202,475
PlumX Metrics