Abstract

The purpose of this article is to provide information concerning the viability of five mathematical models for use in determining the discount for lack of marketability. Based on a comparison to data from the FMV Restricted Stock Study, results from the Chaffe, Finnerty, and Meulbroek models result in discounts within the range of the data for one- and two-year periods, but results from the Longstaff and Tabak models do not. In addition, the Meulbroek model produces results that behave over time in a reasonable way, but there are difficulties in the performance over time with each of the other models. However, the Meulbroek and Tabak models present a theoretical difficulty. Each of these models uses a return from the capital asset pricing model as a basis. As a result, each of these models would show no discount for a restricted security intended to track the market portfolio even though a discount may be theoretically appropriate in such a situation. Finally, all of these models used total volatility of return as an input without segregating the impact of growth on the volatility.