Paper Millionaires: How Valuable is Stock to a Stockholder Who is Restricted from Selling it?

Matthias Kahl, Jun Liu and Francis A Longstaff

University of California at Los Angeles, Anderson Graduate School of Management from Anderson Graduate School of Management, UCLA

Abstract: Many 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 off if they could sell their restricted shares for even a fraction of their unrestricted value. These restrictions also have major effects 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.

Date: 2001-09-01
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Related works:
Journal Article: Paper millionaires: how valuable is stock to a stockholder who is restricted from selling it? (2003)
Working Paper: Paper millionaires: How valuable is stock to a stockholder who is restricted from selling it? (2002)
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