A recently updated study of initial public offerings helps support the level of valuation discount for lack of marketability. The ninth in a series, "The Value of Marketability as Illustrated in Initial Public Offerings of Common Stock May 1997 through December 2000" confirms mean and median marketability discounts in excess of 40 percent. With the exception of the initial study in 1980 and 1981, each study in the series has indicated mean and median discounts ranging from 40 percent to 48 percent.

This most recent study, taking in 44 months instead of the 18-month period covered by each of the previous reports, analyzed 36 sale transactions selected from 222 deals associated with 1,847 IPO prospectuses. Researchers measured the difference between the price sellers of stock would accept before an IPO and the price at which the stock was offered when the company went public. The difference in pre-IPO and IPO prices helps to quantify the discount in value for lack of marketability.

The study analyzed sales of stock in companies with a minimum of $10 million in annual sales, with a loss of no more than 10 percent of sales for the most recent reporting period at the time of the study. Of the 36 sale transactions, 27 involved common stock and nine were for convertible preferred stock. Transactions all occurred within a period of five months of the offering date. Among other findings, the updated study confirms a pattern of diminishing discounts as the IPO date nears.

In addition to the study of traditional businesses, researchers also conducted a "new economy" study focusing on dot-com companies involved in IPOs during the same approximate time frame. Here, they found a higher marketability discount of 54 percent, based on analysis of 53 sales transactions connected to 92 dot-com IPOs.

Finally, the researchers suggest that discounts for lack of marketability may actually be higher in most privately held companies than the 40 percent-plus range they found, because for most companies the probability of increased liquidity promised by an impending IPO is not a factor.

The study, authored by John D. Emory Sr., F.R. Dengell II, and John D. Emory Jr., was published in the September 2001 issue of Business Valuation Review.