Option Pricing Models of Private Equity Valuation : A Comparative Analysis

The question how best to value privately-held equity for various purposes remains an open debate. In general, valuation models are asset-based, income-based or hybrid models, etc. In this study, we focus on Option Pricing Methodology (OPM), one of the widely used valuation models. We evaluate the relative performance of Black-Scholes Model vis-à-vis Finnerty Model. We consider the valuation accuracy of both the models under different liquidation periods. Among various option pricing methodologies used to calculate Discount for Lack of Marketability (DLOM), Chaffee European Put Option Model (based on the Black-Scholes option pricing model) was found to be a better technique