SEO pricing with marketability restriction: A Monte Carlo method with stochastic return and volatility

In capital market, second equity offering (SEO) is the main method of refinancing for listed companies. Private placement is a representative example of SEO. And in recent years, more and more irrational phenomena have been rising with private placement in Chinese stock market because of lack of efficient pricing method. The research on stock pricing for private placement in China is of great significance. We consider the problem of price estimation in SEO with marketability restriction. In SEO with marketability restriction, especially in private placement, the stock price is determined by price discount and initial price. To estimate the price discount, we employ Longstaff's framework of opportunity cost and extend Longstaff's assumption. In our extended assumption, return and volatility of stock price are given by independent stochastic process. To estimate the initial price of stock in private placement, we introduce residual income method into our pricing model. Monte Carlo method is adopted to simulate the price movement in order to numerically estimate price discount in private placement. And result of empirical analysis shows that our model can effectively price the stock in private placement in China.