The effect of ownership structure on the value of a private company
Baffert II, Gamble Janssens de Bisthoven, Nicolas Tistaert, Jurgen
Baffert II, Gamble
Janssens de Bisthoven, Nicolas
Tistaert, Jurgen
Publication Type
Journal article with impact factor
Editor
Supervisor
Publication Year
2022
Journal
Review of Law & Economics
Book
Publication Volume
18
Publication Issue
3
Publication Begin page
Publication End page
Publication Number of pages
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Abstract
The value of an unlisted company is a contentious issue. This is because investors value marketability and liquidity, but vacillate on the appropriate percentage discount that needs to be applied for the valuation of a private company. As more companies find it easier to remain private, a better understanding of this discount is increasingly important. The extant discount studies are mainly derived from financial and transactional data. They provide reliable averages using large sample sizes, but present few determinants to explain the wide ranges in the observations. Our research is based on a unique, alternative data source that complements existing studies by tapping into rich contextual information. Specifically, we examine court decisions that determine the appropriate discount and relate this percentage to an important characteristic of a private company: its “open” character, i.e. its willingness to accept outside shareholders or partners in the venture. We find that open and closed companies differ in value 6.5%. Our conclusions hold after controlling for known determinants of the discount. Our results impact valuation approaches and present real-world application for the owners and managers of private companies who may consider opening ownership to third parties.
Research Projects
Organizational Units
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Keywords
Valuation, Private Company, Discount, Marketability