2) Longstaff (1995) obtains an upper bound on the marketability discount consistent with this range by modeling the value of marketability as the price of a lookback put option.
Section VI furnishes evidence that the marketability discounts predicted by the average-strike put option model are more consistent with empirical private placement discounts than those predicted by the lookback put option model after adjusting for ownership concentration, information, and overvaluation effects.
Longstaff (1995) models the marketability discount as a lookback put option whose value depends upon stock volatility and the time to expiration of the transfer restrictions.
Longstaff (1995) proposes a lookback put option model, and Finnerty (2012) proposes an average-strike put option model that can be used to quantify the loss of timing flexibility.
The lookback put option Model (9) assumes that investors have perfect market-timing ability, whereas the investor is not assumed to have any special timing ability in the average-strike put option Model (10)-(11).
The lookback put option model may be more appropriate in the presence of asymmetric information for equity placed with strategic or related investors, while the average-strike put option model seems more appropriate for (unrelated) institutional investors, who have greater liquidity and are much less likely to have valuable private information about the firm.
The average-strike put option model closely approximates the mean actual private placement discount for the full sample, whereas the lookback put option model substantially overstates it in Table VI.
First, if the lookback put option model explains the discounts in the information-intensive subsample better than the average-strike put option model, then the coefficients of the information intensity variables Risk, Strategic x Fraction, and Related x Fraction should be less significant in the lookback put option model than in the average-strike put option model for the information-intensive subsample, and the coefficient of Risk should be less significant in the lookback put option model for the information-intensive subsample than the full sample because the information effect is already captured in the lookback model discount.
Comparing the regression results in Table VII, the coefficients of Risk, Fraction, and Related x Fraction reverse sign in the lookback put option model regression on the information-intensive subsample, but not in the average-strike put option model regression on the same subsample.