Valuation Efficiency of Secondary Markets for Formerly Illiquid Assets: The Case of German KG Ship Funds

Küster Simic, André; Lauenstein, Philipp; Prigge , Stefan

Volume 20, Number 2 / June , Pages 85-179

Multinational Finance Journal, 2016, vol. 20, no. 2, pp. 127-179
André Küster Simic , Hamburg School of Business Administration, Germany

Philipp Lauenstein , Helmut Schmidt University and Hamburg School of Business Administration, Germany Corresponding Author

Stefan Prigge , Hamburg School of Business Administration, Germany

Abstract:
Until the outbreak of the most recent shipping crisis in late 2008, German KG ship funds had been a prominent vehicle for investing in, and financing of, global shipping operations. Given that KG shares are not designed to be traded, investors are expected to require higher returns as compensation for illiquidity. Since the early 2000s, secondary market platforms for trading of shares in ship funds emerged. If investors could sell their shares at prices reflecting the fundamentals of their asset, lower returns would be demand. Making use of a novel methodological approach, 341 transactions of container ship funds executed from 2007 through 2012 are analyzed. The results reveal a surprisingly high fundamental-valuation efficiency: The identified pricing-relevant variables explain about 86% of the variations in the secondary market valuations of the ship funds. However, it is documented that shares in ship funds trade at discount relative to fundamental asset values.

Keywords : ship finance; KG funds; secondary markets; informational efficiency; market microstructure
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