No-arbitrage Private Market Equity Prices and Transaction Costs: Generalized IPCPL Theory and Private Market Empirical Tests

14 Pages Posted: 25 Mar 2017 Last revised: 23 May 2017

See all articles by David H Goodman

David H Goodman

Gosule, Butkus, & Jesson LLP

Malcolm McLelland

McLelland + Palazzi | Financial economics

Date Written: March 23, 2017

Abstract

Implied private company pricing line theory (IPCPL theory) is based on the fundamental assumption — taken from modern asset pricing theory — that no arbitrage opportunities exist between pricing of privately- and publicly-held equity. More specifically, IPCPL theory is based on the assumption that no arbitrage opportunities exist resulting from differences in equity sale transaction costs across private and public equity markets, while holding risk exposures and sensitivities constant. This study generalizes IPCPL theory to explain and predict the relationship between equity prices set under conditions where equity transaction costs differ across any market setting — including differences both within and across private and public markets — and then presents preliminary empirical evidence from private capital market data that is largely consistent with the theory.

Keywords: no-arbitrage pricing, equity transactions costs, business valuation

JEL Classification: G12, G24

Suggested Citation

Goodman, David H and McLelland, Malcolm, No-arbitrage Private Market Equity Prices and Transaction Costs: Generalized IPCPL Theory and Private Market Empirical Tests (March 23, 2017). Available at SSRN: https://ssrn.com/abstract=2939845 or http://dx.doi.org/10.2139/ssrn.2939845

David H Goodman

Gosule, Butkus, & Jesson LLP ( email )

480 Adams St # 1
Milton, MA 02186
United States

Malcolm McLelland (Contact Author)

McLelland + Palazzi | Financial economics ( email )

Rua Padre Carvalho 408
Pinheiros
Sao Paulo, Sao Paulo 05427-020
Brazil

HOME PAGE: http://www.mclelland-palazzi.com.br

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