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Valuing Thinly-Traded Assets

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  • Francis Longstaff

Abstract

We model illiquidity as a restriction on the stopping rules investors can follow in selling assets, and apply this framework to the valuation of thinly-traded investments. We find that discounts for illiquidity can be surprisingly large, approaching 30 to 50 percent in some cases. Immediacy plays a unique role and is valued much more than ongoing liquidity. We show that investors in illiquid enterprises have strong incentives to increase dividends and other cash payouts, thereby introducing potential agency conflicts. We also find that illiquidity and volatility are fundamentally entangled in their effects on asset prices. This aspect may help explain why some assets are viewed as inherently more liquid than others and why liquidity concerns are heightened during financial crises.

Suggested Citation

  • Francis Longstaff, 2014. "Valuing Thinly-Traded Assets," NBER Working Papers 20589, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:20589
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    Cited by:

    1. Nadauld, Taylor D. & Sensoy, Berk A. & Vorkink, Keith & Weisbach, Michael S., 2019. "The liquidity cost of private equity investments: Evidence from secondary market transactions," Journal of Financial Economics, Elsevier, vol. 132(3), pages 158-181.
    2. Andrew Coleman, 2019. "Liquidity, the government balance sheet, and the public sector discount rate," Working Papers 19_13, Motu Economic and Public Policy Research.
    3. Markus Doumet & Peter Limbach & Erik Theissen, 2016. "Ich bin dann mal weg: Werteffekte von Delistings deutscher Aktiengesellschaften nach dem Frosta-Urteil [Wealth Effects of Delistings by German Firms After the Frosta Decision]," Schmalenbach Journal of Business Research, Springer, vol. 68(3), pages 253-277, August.

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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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