Investment with Restricted Stock and the Value of Information

23 Pages Posted: 13 Jan 2005

See all articles by Weixing Wu

Weixing Wu

UIBE

Yongxiang Wang

University of Southern California - Marshall School of Business

Date Written: November 2003

Abstract

In most public companies in China, there are two thirds of shares that can't be traded freely in the secondary market. These illiquid shares, however, may be allowed to circulate unexpectedly one day. This paper delves into the investor's financial decision-making with restricted stock in a continuous-time framework. Accordingly, this paper assumes that removal of trade restriction arrives as a Poisson process. In the spirit of Merton(1969,1971), an analytical solution to the investor's optimal portfolio problem is derived and the price (or cost) of illiquidity can be calculated using numerical methods. Furthermore, the value of information is discussed in this framework. Numerical simulation shows that illiquidity has an important influence on the investor's optimal strategy. This model may provide a theoretical framework to assess the cost of state-owned equities (SOEs).

Keywords: restricted stock, illiquidity, continuous-time finance, optimal portfolio strategy

JEL Classification: G11, G12, G14

Suggested Citation

Wu, Weixing and Wang, Yongxiang, Investment with Restricted Stock and the Value of Information (November 2003). Available at SSRN: https://ssrn.com/abstract=647845 or http://dx.doi.org/10.2139/ssrn.647845

Weixing Wu (Contact Author)

UIBE

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

Yongxiang Wang

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

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