Discount Share (Stock) - Explained
What is Discount Share?
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Table of ContentsWhat is a Discount Share (Stock)?How Does a Discount Share Work?Academic Research on Discount Share
What is a Discount Share (Stock)?
These are the stocks issued in the market to be sold for less than its nominal value or par value. It also refers to selling shares below the fair market value. The nominal value or par value of a share is the minimum price for a specific class of stock to be sold in a public or private offering. The company charter states the par value.
How Does a Discount Share Work?
Discount shares are issued at a discount price to incentivize the investors to purchase the stocks. For this purpose, it is common to issue shares at a price below the market value. It is not common, however, to issue shares below their par value. In general, there is no connection between the market price and par value. Nowadays most of the stocks are issued without a par value. In most of the states of the U.S., it is prohibited to sell the shares at a price less than its nominal or par value. The legal restriction of selling the shares at such a discounted rate is in effect to safeguard the interest of the creditors of the company. The discounted share may result in a deficiency in company capital and shortage of assets. The assets are needed to pay the debt in case of insolvency. Also, the shareholders purchasing the discount shares may face contingency liability to the creditors for the price difference. There are certain exceptions to the rule where a share can be purchased at a discounted rate below par value. Employees with certain stock options are allowed to purchase the share at a low price. Companies may grant a discount on the stocks for their employees at an early stage. The market value may increase at the time when the employees can actually purchase the share, but they are legally permitted to purchase it at a discounted rate.
Academic Research on Discount Share
- Information asymmetry and asset prices: Evidence from the China foreignshare discount, Chan, K., Menkveld, A. J., & Yang, Z. (2008). The Journal of Finance,63(1), 159-196. This paper examines the effect of information asymmetry on equity prices in the local A and foreign Bshare market in China. The paper constructs measures of information asymmetry based on market microstructure models, and find that they explain a significant portion of crosssectional variation in Bshare discounts, even after controlling for other factors.
- Consumer shopping value, satisfaction and loyalty indiscountretailing, Carpenter, J. M. (2008). Journal of retailing and consumer services,15(5), 358-363. This study investigates the complex interrelationships between utilitarian and hedonic shopping value and important retail outcomes for discount retailers. The paper shows that utilitarian and hedonic shopping value are found to influence key outcome variables including satisfaction, loyalty, word of mouth communication and share of purchases in the highly competitive discount retail sector.
- SplitShareStructure Reform, corporate governance, and the foreignshare discountpuzzle in China, Hou, W., & Lee, E. (2014). The European Journal of Finance,20(7-9), 703-727. This paper examines the impact of the Split Share Structure Reform on the well-known foreign share discount puzzle in China. It uses existing literature to confirm that foreign investors are more concerned about insider expropriation because of their information disadvantage relative to domestic investors.
- A corporate governance explanation of the ABshare discountin China, Tong, W. H., & Wayne, W. Y. (2012). Journal of International Money and Finance,31(2), 125-147. This paper suggests that B-shares listed in China are traded at substantial discounts to their corresponding A-shares although they have identical rights. The paper goes on to provide a a governance explanation and suggest that relative to domestic investors, foreign investors care more about a firms governance quality. Results are supportive, as the B-share price discount is higher for firms that have weaker governance characterized by higher ownership concentration, ineffective boards with a higher proportion of directors appointed by the parent company, lower dividend payouts, and higher levels of information asymmetry.
- Market segmentation and stock pricesdiscountin the Chinese stock market: Revisiting B-sharediscounts in the Chinese stock market, Rui, O. M., Wu, W., & Lee, B. S. (2007). This paper explores the determinants of B-share discounts in the Chinese stock market based on a unique regulatory change in 2001. Findings show that the B-share discounts declined substantially after the lifting of restrictions on foreign ownership in China, but the H-share discount remained virtually unchanged. Using various cross-sectional analyzes, the paper also finds that relative supply and behavior factors such as relative spread (or liquidity) and relative risk affect the discounts throughout the sample period.
- Conceptual problems in the use of riskadjusteddiscountrates, Robichek, A. A., & Myers, S. C. (1966). The Journal of Finance,21(4), 727-730. This study was supported, in part, by funds made available by the Ford Foundation to the Graduate School of Business, Stanford University. The conclusions, opinions, and other statements in this paper are those of the authors and are not necessarily those of the Ford Foundation.
- US cross-listing and China's B-share discount, Yang, T., & Lau, S. T. (2005). Journal of Multinational Financial Management,15(4-5), 334-353. In contrast with price premium for foreign shares in other countries, China's foreign shares (B-shares) are unique in that they are traded at a large discount from their domestic shares (A-shares). This paper examines how the presence of Chinese stocks in the U.S. affects this discount.
- Optimal investment and financing policy, Gordon, M. J. (1963). The Journal of finance,18(2), 264-272. This paper explores the debate on stock price valuation. This study contributes to this debate by determining the relative importance of stock dividends and retained earnings regarding stock price valuation in Karachi Stock Exchange. Data for the analysis of this study were collected from the 66 nonfinancial companies that were included in KSE-100 index for a period from 2007 to 2010. This study found the evidence that dividends are more important variable than the retained earning regarding the explanatory power of stock prices in Karachi Stock Exchange. The implications of this finding are documented.
- The optimal face value of adiscountcoupon, Ben-Zion, U., Hibshoosh, A., & Spiegel, U. (1999). Journal of Economics and Business,51(2), 159-174. The paper analyzes the decision made by firms to issue one-time coupons as a means of attracting new deal-prone customers. Given the structure of the market and the share of loyal customers, the paper derives boundaries for the value of the coupon, as well as the optimal face value of the coupon. The paper aims to show that the optimal share of discount out of the profit margin per customer should never exceed the customer share of the deal-prone segment.
- The increasing power of store brands: building loyalty and marketshare, Steenkamp, J. B. E., & Dekimpe, M. G. (1997). Long range planning,30(6), 917-930. This paper examines the growing success of store brands as an important evolution in the retailing industry. The paper provides an operational measure to quantify the power of store brands along two dimensions: the intrinsic loyalty of their customer base, and their conquesting power to attract potential switchers. The paper uses the proposed operationalization to evaluate the absolute and relative strength of Albert Heijn, the leading Dutch store brand, in 19 product categories.
- Sharerepurchase and takeover deterrence, Bagwell, L. S. (1991). The Rand journal of economics, 72-88. This article examines the use of share repurchase as a takeover deterrent.
- Public and private sectordiscountrates in publicprivate partnerships, Grout, P. A. (2003).The Economic Journal,113(486), C62-C68. The purpose of this paper is to assess the appropriate private and public sector discount rates in the context of public private partnerships.