Marketability and Value: Measuring the Illiquidity Discount

60 Pages Posted: 14 Nov 2005

See all articles by Aswath Damodaran

Aswath Damodaran

New York University - Stern School of Business

Date Written: July 30, 2005


Should investors be willing to pay higher prices for more liquid assets than for otherwise similar assets that are less liquid? If the answer is yes, how much should the premium be for liquid assets? Conversely, how do we estimate the discount for illiquid assets? In this paper, we argue that it is a mistake to think of some assets as illiquid and others as liquid and that liquidity is a continuum, where some assets are more liquid than others. We then examine why liquid assets may be priced more highly than otherwise similar illiquid assets and why some investors value liquidity more than others. We follow up be presenting the empirical evidence that has accumulated over time and across different assets - financial and real - on the cost of illiquidity. Finally, we consider how we can use the theory and evidence on illiquidity to estimate the effect of illiquidity on the value of an asset or business.

Keywords: marketablity, illiquidity discount, liquidity discount, liquidity

JEL Classification: G12, G24, G34

Suggested Citation

Damodaran, Aswath, Marketability and Value: Measuring the Illiquidity Discount (July 30, 2005). Available at SSRN: or

Aswath Damodaran (Contact Author)

New York University - Stern School of Business ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0340 (Phone)
212-995-4233 (Fax)


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