NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Paper millionaires: How valuable is stock to a stockholder who is restricted from selling it?

Matthias Kahl, Jun Liu, Francis A. Longstaff

NBER Working Paper No. 8969
Issued in May 2002
NBER Program(s):   AP

Many firms have stockholders who face severe restrictions on their ability to sell their shares and diversify the risk of their personal wealth. We study the costs of these liquidity restrictions on stockholders using a continuous-time portfolio choice framework. These restrictions have major effects on the optimal investment and consumption strategies because of the need to hedge the illiquid stock position and smooth consumption in anticipation of the eventual lapse of the restrictions. These results provide a number of important insights about the effects of illiquidity in financial markets.

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Published: Kahl, Matthias, Jun Liu, and Francis A. Longstaff. "Paper Millionaires: How Valuable is Stock to a Stockholder Who is Restricted from Selling it?" The Journal of Financial Economics 67 (2003): 385-410.

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