Schill Zhou.Pricing an Emerging Industry 17 0.93,1.12,and 1.13,respectively.These values are somewhat smaller than the respective 1.36.1.02.1.19.and 1.30 estimates reported respectively in Table I.However,the implications are unchanged.The indirect holdings trade at a discount.Valued at an upper bound,the expected dilution due to the derivative securities for the parents explains only a small part of the curious valuation relation. C.Liquidity Another consideration is the difference in liquidity between direct and indirect asset holdings.Given that the parent's holdings may not be highly liquid,if we measure holding value to parent value using market prices,we might inflate the true value of the indirect holdings.Malkiel (1977)finds that closed-end funds that have greater holdings of restricted stock tend to experience larger discounts.Since restricted stock is not registered for public sale by the SEC,it may be underpriced to reflect the cost of poor liquidity.Although the relation is significant.Malkiel acknowledges that the impact of restricted stock is not sufficient to explain the magnitude of the closed-end fund discount.Lee,Shleifer,and Thaler(1991) also dismiss liquidity as an explanation for the closed-end fund discount. In a carve-out.the parent's holdings can be restricted in two ways.First,the original offering agreement often restricts the parent company from further liquidating their holdings for a certain period of time.Although this restriction may be binding.since the restriction is only for a short period of time(usually less than a year).it should not create a material value impact.s Since the parent's holdings represent substantial blocks of shares in the subsidiary,an alternative consideration is the discount required to quickly liquidate such a block on the open market.Because the market price of UBID reflects a 100%premium.the block-discount hypothesis requires that block holding liquidations must occur at more than a 50%discount. The block-discount hypothesis faces two challenges in explaining a large discount of a parent to its subsidiary.The first challenge is that if a parent company sells a large block of subsidiary holdings in the open market at a discount,the market value of the subsidiary is affected in the same way.Barclay,Holderness,and Pontiff(1993)show that large block ownership is associated with value reduction.Based on their finding,the subsidiary should trade at a discount in the market because its parent company owns a large block of its shares. Another challenge is that even though a 50%discount might be plausible for selling a large block in a short period,parent firms can realize the value of their holdings in less costly ways.Parents can spin off their holdings to shareholders through a stock dividend.Parents of carve-outs often use follow-on spin-off transact:ons.For example,DZTK.HNCS,and MALL announced the spin-off to parent shareholders of their entire subsidiary holdings six months after the original carve-out. Parents can also do follow-on carve-outs.For example,in the related biotechnology sector. Longstaft(1995)provides an estimate of the upper hound of the value of the marketability restriction with an option-based approach.He finds that the opportunity cost for holding restricted shares is high if an investor has perfect timing skill.Despite the potential for a marketability restrctions on parent-held shares.investors may not discount the price of parent shares for a number of reasons.First.the marketability restriction is only binding for those investors with timing skills.Those investors with little timing skills or who plan to hold the shares beyond the restricted period value the parent's restricted shares identically to the unrestricted shares.Second. short sale opportunities allow investors with perfeet timing skill to replace the unrestricted share payout using only positions in the parent firm and the unrestricted shares.onsder an investor who owns one share of the parent company and through his ownership of the parent.he indirectly owns some shares.for simplicity,say one share of the subsidiary.Suppose that the investor feels that the hest time to sell his indirect holding of subsidiary is at some time s<T.where T is the end of the restriction.But he cannot do so because of marketability restriction.He can achieve the same goal by short selling one share of the traded shares in the subsidiary instead