Definition for : Liquidity discount

Liquidity discount is a lower valuation applied to illiquid Shares. Lack of liquidity may increase Volatility of the Share price. Therefore Investors will discount (see Discounting) an illiquid Investment at a higher rate than a liquid one. This higher Discounting rate will result in the liquidity discount.

(See Chapters Chapter 19 The required rate of return and Chapter 32 Capital structure and the theory of perfect capital markets of the Vernimmen)

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