Special Discount Study (SDS)
Background of the Study:
-The special discount study (SDS) presents a new way of justifying your Discount for Lack of Marketability (DLOM)
-SDS uses liquidity to determine illiquidity to defend your DLOM
-SDS examines the relationship between special dividends and the change in company value to show how liquidity and thus illiquidity impacts a company’s value
-The study demonstrates the relationship between the issuance of a special dividend and its subsequent impact on a company’s stock prices over time to demonstrate investors value liquidity
-The study began to prove the hypothesis that liquidity increases a company’s value and therefore the inverse should be true that illiquidity decreases a company’ value similarly
-SDS shows how public company data on the impact of liquidity on a company’s value can be extrapolated and applied to a private company’s value
-This is an ongoing study and the data included in the file and statistical conclusions will be updated biannually as more data becomes available
-If you use this data in a report or presentation, you should give attribution to mergershark.com in your references
-The SDS study data is available for free download below
What is a Special Dividend (SD) and Special Dividend Key Terms:
-A SD is a non-recurring one time distribution of company assets, usually in the form of cash to shareholders separate from the regular cycle of dividends
-Most SDs are unusually larger than the other dividends paid to shareholders
-A SD may be related to a certain event or occur when a company wants to make changes to its financial structure or spin off a subsidiary company to shareholders
-Most companies do not regularly issue SDs
-SD declaration date = date special dividend was publicly declared; if the dividend was declared after the stock market close at 4 p.m. the declaration date is that day for analysis purposes; if the dividend was declared while the stock market was open we use the prior day as declaration date for analysis purposes
-Ex-dividend date = trading date which the dividend is not owed to a new buyer of the stock; shareholders on record are entitled to the special dividend
-Study measurement period = the change in the company’s stock price over the above two dates
The Special Dividend Study (SDS):
-Includes over 100 special dividends (SD) issued from October 2012 to May 2022
-SDs were obtained from press releases in the Wall Street Journal, Barron’s and other financial publications
-Examines how the issuance of the SD impacted the company’s stock price
-Considers how the impact of the issuance of the SD on the company’s stock price differs by market capitalization
-Examines the impact on company value of unexpected liquidity
-To be included the SDs had to be: paid in cash; non-recurring/one time; not part of a liquidation or sale of unit; and not foreseen or anticipated by the market
-SDs that were excluded from the study include the following: previously announced transactions; reoccurring in the same year; company has history of SDs; issued after sale of a division or investment and thus could be anticipated by investors; issued after unusually high earnings due to one time items
1 Day Stock Price Changes:
-Theoretically the issuance of a SD should decrease a company’s share price by the dividend amount on the ex-dividend date
-The SDS generally found a majority of companies had their 1 day stock price increase (or decrease very marginally)
-The average 1 day stock price change was an increase of 5.23% or 93.25% of the SD
-The median 1 day stock price change was an increase of 3.34% or 59.5% of the SD
1 Week Stock Price Changes:
-The average 1 week stock price change was an increase of 7.96% or 129.90% of the SD
-The median 1 week stock price change was an increase of 5.13% or 93.71% of the SD
What Does the Study Show:
-Ability to pay a SD increases company values
-Trading volumes spiked significantly on the SD declaration day
-Higher trading volume increases liquidity
-Investors value liquidity
-Liquidity creates value (whereas we know illiquidity decreased value)
-This is true for both publicly traded and privately held companies
Special Dividend Study Conclusions:
-The issuance of SDs created a “premium” to the company’s stock price
-We posit that similarly this shows a lack of liquidity would create a “discount” in a company’s value
-Declaration of a SD increases liquidity
-Reinforces the concept that liquidity creates value and illiquidity decreases value
-We believe the SDS data can be used to determine private company discounts
-On average larger stock price increases post declaration of the SD were seen with companies with smaller market capitalizations
-On average smaller stock price increases post declaration of the SD were seen with companies with larger market capitalizations
-Bigger companies tend to have smaller changes in value, whereas smaller companies tend to have larger changes in value
-We can use the inverse of the SDS results to extrapolate a private company illiquidity “discount”
-Most privately held companies tend to be smaller than the SDS sample group and the discount applied to them for illiquidity should be larger
-The extrapolated median positive change in stock price post declaration of a SD for companies with a market capitalization of less than $50 million can be used as a baseline discount for illiquidity for many privately held companies
-Results similar to other DLOM studies, such as restricted stock studies, pre-IPO studies and LEAP stock studies that show illiquidity increases as size decreases
-SDS is another tool that can be used for private company DLOMs
-SDS confirms what other discount studies show, but with useful market based data
