The Effect of Ownership Structure on the Value of a Private Company

Johan Van den Cruijce (), Baffert II Gamble, Janssens de Bisthoven Nicolas and Tistaert Jurgen
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Johan Van den Cruijce: Vlerick Business School, Reep 1, Gent 9000, Belgium
Baffert II Gamble: Vlerick Business School, Gent, Belgium
Janssens de Bisthoven Nicolas: Vlerick Business School, Gent, Belgium
Tistaert Jurgen: Vlerick Business School, Gent, Belgium

Review of Law & Economics, 2022, vol. 18, issue 3, 325-346

Abstract: The value of an unlisted company is a contentious issue. This is because investors value marketability and liquidity, but vacillate on the appropriate percentage discount that needs to be applied for the valuation of a private company. As more companies find it easier to remain private, a better understanding of this discount is increasingly important. The extant discount studies are mainly derived from financial and transactional data. They provide reliable averages using large sample sizes, but present few determinants to explain the wide ranges in the observations. Our research is based on a unique, alternative data source that complements existing studies by tapping into rich contextual information. Specifically, we examine court decisions that determine the appropriate discount and relate this percentage to an important characteristic of a private company: its “open” character, i.e. its willingness to accept outside shareholders or partners in the venture. We find that open and closed companies differ in value 6.5%. Our conclusions hold after controlling for known determinants of the discount. Our results impact valuation approaches and present real-world application for the owners and managers of private companies who may consider opening ownership to third parties.

Keywords: valuation; private company; discount; marketability (search for similar items in EconPapers)
JEL-codes: G30 G39 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1515/rle-2022-0030

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