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Paper millionaires: How valuable is stock to a stockholder who is restricted from selling it?

Matthias Kahl, Jun Liu and Francis Longstaff

No 8969, NBER Working Papers from National Bureau of Economic Research, Inc

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. These restrictions 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.

JEL-codes: G11 (search for similar items in EconPapers)
Date: 2002-05
Note: AP
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Published as Kahl, Matthias, Jun Liu, and Francis A. Longstaff. "Paper Millionaires: How Valuable is Stock to a Stockholder Who is Restricted from Selling it?" The Journal of Financial Economics 67 (2003): 385-410.

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