Discounting Restricted Securities

58 Pages Posted: 16 Apr 2020 Last revised: 20 Nov 2020

See all articles by Tarik Umar

Tarik Umar

Rice University

Emmanuel Yimfor

University of Michigan, Stephen M. Ross School of Business

Rustam Zufarov

University of Illinois at Chicago

Date Written: March 23, 2020

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

Suggested Citation

Umar, Tarik and Yimfor, Emmanuel and Zufarov, Rustam, Discounting Restricted Securities (March 23, 2020). Available at SSRN: https://ssrn.com/abstract=3559536 or http://dx.doi.org/10.2139/ssrn.3559536

Tarik Umar (Contact Author)

Rice University ( email )

Houston, TX
United States

HOME PAGE: http://https://business.rice.edu/person/tarik-umar

Emmanuel Yimfor

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States

Rustam Zufarov

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

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