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Discounting Restricted Securities

Published online by Cambridge University Press:  15 August 2022

Tarik Umar Open the ORCID record for Tarik Umar [Opens in a new window] ,
Emmanuel Yimfor  and
Rustam Zufarov
Tarik Umar*
Affiliation:
Rice University Jones Graduate School of Business
Emmanuel Yimfor
Affiliation:
University of Michigan Ross School of Business eyimfor@umich.edu
Rustam Zufarov
Affiliation:
University of Illinois at Chicago College of Business Administration zufarov@uic.edu
*
tarik.umar@rice.edu (corresponding author)
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Abstract

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We examine the costs of trading restrictions by exploiting an SEC rule change eliminating an approximately 80-day restriction period in private placements for small issuers. Using a difference-in-differences specification, we find that the restriction is binding, as dollar volume increases 19 percentage points vis-à-vis proceeds, and costly, as offering discounts fall by 8 percentage points. Discounts fall more for issuers with higher information asymmetry or longer restriction periods. We account for endogenous responses to the rule change. Overall, our findings suggest that trading restrictions are costly and have large effects on firms’ cost of capital.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 1 , February 2023 , pp. 419 - 448
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank conference participants at the 2019 Lone Star Conference (discussant Praveen Kumar), the 2020 International Conference on Derivatives and Capital Markets (discussant Anastasios Kagkadis), the 2020 FMA (discussant Ke Yang), the 2020 SWFA (discussant Tim Park), the 2020 IFA, and the 28th SFM, and seminar participants at Rice University. This article benefited from feedback from Alan Crane, Kevin Crotty, Ioannis Floros, Matthew Gustafson, Peter Iliev, Francis Longstaff, Shiva Sivaramakrishnan, and James Weston.

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