Paper Millionaires: How Valuable is Stock to a Stockholder Who is Restricted from Selling it?
AbstractMany firms have stockholders who face severe restrictions on their ability to sell their shares and diversify the risk of their personal wealth. We study the costs of these liquidity restrictions on stockholders using a continuous-time portfolio choice framework. The economic cost of these restrictions can be large and many stockholders would actually be better oï¬€ if they could sell their restricted shares for even a fraction of their unrestricted value. These restrictions also have major eï¬€ects on the optimal investment and consumption strategies because of the need to hedge the illiquid stock position and smooth consumption in anticipation of the eventual lapse of the restrictions. These results provide a number of important insights about the effects of illiquidity in financial markets.
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Bibliographic InfoPaper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number qt8b3853z9.
Date of creation: 01 Sep 2001
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