Deja Vu #5: The Maher Restricted Stock Study (1976)

J. Michael Maher published his restricted stock study in September 1976.[1] The article begins by noting that the typical marketability discount (in tax-related cases) was about 20%, up from 10% to 15% just a few years earlier.

Using a methodology similar to Moroney’s, Maher compares marketability discounts applied to restricted securities versus publicly traded stock of the same class of a variety of issuers.[2]  He studied the SEC filings of four mutual funds to examine the discounts they required on purchases of restricted securities from 1969 to 1973. The recession years of 1974-75 were omitted because of a paucity of transactions. In total, the Maher study considers 34 transactions, which are summarized in Figure 2-8.

Figure 2-8

Maher found a mean discount of 35.4% from the data above (and a standard deviation of 17.6%). Adjusting for the highest and lowest 10% of observations, the mean was virtually unaffected at 34.7%. His data is further summarized in Figure 2-9 below.

Figure 2-9

Of Maher’s 34 restricted stock transactions, just over a third reflected a discount of 30% or less (12 of 34). Alternatively, almost two-thirds of the transactions were conducted at discounts of 30% or more from the freely traded prices of the underlying public securities.

Note that while the mean and average are in the range of 33% to 35%, the standard deviation is quite large at 17.6%.

Maher considered the costs of flotation as an aspect of marketability discounts. He reviewed data from the SEC Study which indicated that flotation costs for the small issues of restricted shares under study might be in the range of 10% to just over 13%.[3]   The implication was that: “most of the discounts could not be justified on the basis of the cost of making the stock marketable.”[4]

Maher concluded with the following:

The result I have reached is that most appraisers underestimate the proper discount for lack of marketability. The results seem to indicate that this discount should be about 35%. Perhaps this makes sense because by committing funds to restricted common stock, the willing buyer (a) would be denied the opportunity to take advantage of other investments, and (b) would continue to have his investment at the risk of the business until the shares could be offered to the public or another buyer is found.

The 35% discount would not contain elements of a discount for  minority interest because it is measured against the current fair market value of securities actively traded (other minority interests). Consequently, appraisers should also consider a discount for a minority interest in those closely held corporations where such a discount is applicable.[5] [emphasis in original][6]

The italicized quotation above has, we believe, been misinterpreted in its application to nonmarketable minority interests in closely held businesses. Its quotation in Pratt’s Valuing a Business has, unfortunately, contributed to a misconceived notion that nearly every marketability discount should be about 35%.[7]

[Current Note.  Maher was thinking in terms of a levels of value chart with three levels; however, conceptually, his argument regarding the possible imposition of a minority interest discount would not work.  The base value from which the restricted stock discount was taken is marketable minority, which would already include any minority interest discount.]

The variability of discounts in Maher’s study undermines this conclusion. Maher’s 35% estimate was used as a basis for comparison to show that then-current Tax Court determinations of marketability discounts were too low. Maher did not take the extra steps Moroney did to discuss the specific elements that contribute to marketability discounts.

Figure 2-10 provides a scatter diagram of the discounts found in Moroney’s study of ten funds and includes the Maher observations as Fund 11.

Figure 2-10

The diagram provides clear and visual evidence that the early studies do not support a blanket 35% marketability discount. Further, the studies do not support a “benchmark range” of 35% to 45% for marketability discounts, a concept we will discuss later. [8]

[Current Note.  We stated in footnote 8 some 25 years ago that Judge Laro’s so-called “benchmark range” in Mandelbaum made no sense, citing Figure 2-10 above and the fact that averages of restricted stock discounts could not be used to establish marketability discounts for illiquid minority interests of private companies.]

[Concluding Note.  I recently reviewed three appraisal reports performed in 2021 or 2022.  All three cited these same restricted stock studies to justify marketability discounts ranging from 5% (for a controlling interest no less) to 15% to 20% to 25% to 30%. If the appraisers are called upon to defend their methodologies and conclusions, I believe they are not likely to succeed unless their opposing experts use the same methodology.

If you are along for the ride of this series, I hope you are realizing or have realized that the “traditional” way of guessing at marketability discounts does not work.

For example, one of Judge Laro’s “factors” was the payment of dividends or distributions. Assume the benchmark average restricted stock discount is 35%, realizing that none of the companies in the sample studies paid dividends. Now assume further that:

  1. One illiquid subject interest pays a dividend with a yield of 2% (relative to the marketable minority value)
  2. A second interest and another subject interest pay a dividend yield of 8%.
  3. The expected holding period is about three years or similar to the typical holding period of restricted stock transactions.
  4. Make whatever other assumptions you want to make.
  5. And, you cannot make any quantitative calculations, since this is the Mandelbaum method.

If you can estimate the appropriate marketability discount for interests one and two above, please do so and reply below. I certainly welcome any comments or challenges to the conclusions.]

In the meantime, be well,


[1] Maher, J. Michael, “Discounts for Lack of Marketability for Closely Held Business Interests,” Taxes – The Tax Magazine, September 1976, pp. 562-571.

[2] Maher cites the Moroney study in his article.

[3] Ibid, p. 571.

[4] Ibid, p. 571.

[5] Ibid, p. 571.

[6] Reference to Figure 1-1 [levels of value chart] will show clearly that Maher was wrong on this point. No further discount is applicable after the marketability discount has been applied to a marketable minority interest value indication.

[7] Pratt, op. cit., p. 246, as well as in previous editions of the book published in 1981 and 1989. This is no more a criticism of Dr. Pratt than it is of all business appraisers, myself included, who have not previously investigated these critical relationships in more depth.

[8] See Mandelbaum, et al. v. Commissioner (T.C. Memo 1995-255). In this recent case, the Court postulated a “benchmark range” of 35% to 45% for marketability discounts based on the restricted stock studies noted above as well as the pre-IPO studies discussed in Chapter 3. See the further discussion in Chapter 4.


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