Discount for Lack of Marketability: An Empirical Analysis

Finance literature defines asset liquidity as the ability to convert an asset to cash within a reasonable amount of time, and without a significant loss of value. Stock exchange authorities recognize the importance of liquidity in maintenance of a fair and orderly market. Market microstructure rules laid down by the NASDAQ exchange provide that a security can be delisted from the exchange as unlikely to be fairly priced if sufficient liquidity is lacking. A delisting from NASDAQ results in substantial loss of marketability. This paper analyzes a sample of such delistings from the NASDAQ market and develops a quantitative model providing an explanation for the observed reduction in value attributable to this loss of marketability. The relationship between liquidity and value is confirmed by this analysis.