The Performance of Option Pricing Models Estimating the Marketability Discount in a Pre-IPO Real-World Data Setting: Evidence from Europe

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Abstract

Valuation analysts adjust prices of private firm’s stock downward from their fully marketable counterparts, reflecting the private firms’ lower level of marketability. This discount for lack of marketability can be substantial in magnitude. This study examines the performance (according to bias and accuracy employing estimation error methodology) of seven popular option pricing models in generating discount estimates to coincide with empirically observed discount benchmarks (based on the pre-IPO methodology) in European Union member countries over the period 2004 until 2018. The results allow for the general conclusion that some option pricing models are superior in most settings, coinciding with their individual benefits and deficiencies. The detailed analysis indicates that (i) the superiority of these option pricing models holds for a wide range of periods of assumed restricted marketability, (ii) segmenting discount benchmarks according to their size improves the performance of the option pricing models, (iii) segmenting discount benchmarks according to both, the underlying volatility of stock returns and dividend yields, does not improve the performance of the option pricing models, and (iv) IPO underperformance has no material impact on relative option pricing model’s performance.
Original languageEnglish
Number of pages37
Journal Journal of Business Valuation and Economic Loss Analysis
Early online dateFeb 2022
DOIs
Publication statusE-pub ahead of print - Feb 2022

Keywords

  • business valuation
  • discount for lack of marketability
  • marketability discount
  • option pricing models
  • private firms
  • valuation adjustments

ASJC Scopus subject areas

  • Economics and Econometrics
  • Accounting
  • Business and International Management
  • Finance
  • Strategy and Management

Fields of Expertise

  • Sonstiges

Treatment code (Nähere Zuordnung)

  • My Favorites
  • Application
  • Theoretical

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