For the combined sample for all periods the relationship was statistically significant at the five percent level but explained only four percent of the variance in the discount. The results differ when the independent variable is time. Why there is a difference when time is the explanatory variable is not obvious. Despite the statistical significance of the correlations described above, the explanatory power of the estimated equations is relatively low, ranging from three to 20 percent of the variation in the discounts about the sample means. In general, the tests conducted on the Emory data support the notion that the greater the risk that an IPO will not take place or will not take place at an anticipated price the lower the stock price in a pre-IPO transaction.
Time is the proxy for risk most extensively tested and demonstrated herein.
Although the analysis says nothing about what the discount should be if a liquidity event is more than five months away, logically the discount would be greater. There is still substantial unexplained stock-specific variance. However, these results shift the burden to the analyst who wants to use a lower discount. Use of a lower discount requires a very good explanation of why a liquidity event is more certain to occur than for the average stock with an anticipated IPO or why the stock's attributes would make a willing buyer and a willing seller less concerned than usual with the lack of marketability. The author wishes to thank Anna Lau and Elizabeth D. Saunders, Research Assistants at Philip Saunders Associates, who assisted with analysis of the data.