Estimating Blockage Discounts

Abstract

When an estate includes publicly traded shares, or a divorce settlement requires equitable distribution of publicly traded shares and these shares constitute a large block of the company’s outstanding shares, the valuation of these shares often anticipates a blockage discount for liquidating large volumes of shares. However, there is very little literature on this blockage discount, which has resulted in a wide divergence in court opinions regarding this subject. This article examines the price-volume relationship in several broad equity indexes (S&P 100, S&P 500, NASDAQ, and Russell 2000) to determine insights into the plausibility of any discount arising from unusually large trading volume. The article also explains a hedging strategy that will mitigate the adverse effect of any blockage discount, if one was presumed to exist.

TOPICS: Security analysis and valuation, wealth management, legal/regulatory/public policy