Discounting Restricted Securities

Abstract

We examine the costs of trading restrictions by exploiting an SEC rule change that eliminates a 60-day restriction period in private placements for small issuers. Using a difference-indifferences specification, we find that the restriction is binding, as turnover increases by 30% following its removal, and costly, as offering discounts fall by eight percentage points (a 66% decrease). Discounts fall 80% more for issuers with high information asymmetry. Our results are robust to tests that account for endogenous response to the rule change. Overall, our findings suggest that trading restrictions are costly and have large effects on firms’ cost of capital.

Keywords: Trading restrictions, marketability, offering discounts

JEL Classification: G30, G32, G12