What does a higher liquidity premium signify for public companies compared to private companies?

A higher liquidity premium signifies that investors value the ability to easily buy or sell an asset without significantly impacting its price. In the context of public companies, which typically have shares traded on exchanges, liquidity is higher because they offer easier access to capital for investors. This ease of trading reduces the risk associated with holding the asset, and as a result, investors are often willing to pay more for shares of public companies than for private companies, which may have less market activity, slower transaction times, and greater difficulty in buying or selling shares.

When comparing public companies to private ones, the liquidity premium reflects the premium that investors assign to assets that can be quickly converted to cash or traded in large volumes. This increased willingness to pay more for publicly traded companies is indicative of the higher demand for liquid assets. Thus, a higher liquidity premium in this scenario indicates that investors are more inclined to pay a premium for the shares of public companies because of their enhanced access to capital and the associated lower risk brought about by greater market liquidity.