Why is blockage premium not applicable for closely held companies?

The correct answer highlights that blockage premium is not applicable to closely held companies primarily because there are typically no prevailing market prices available for these entities. Blockage premiums exist in the context of publicly traded companies, where large blocks of shares can be sold at a discount to market price due to the significant impact that the sale of a large quantity of shares may have on the market. This phenomenon arises because the public market is responsive to the supply and demand dynamics triggered by such large sales.

In closely held companies, shares do not trade on a public exchange, which means that there is no established market price for individual shares. Consequently, there is no market mechanism to observe how a large transaction would affect the price. Without prevailing market prices, the concept of a blockage premium simply becomes irrelevant.

The other options present various characteristics that might not necessarily apply or contribute to the applicability of blockage premiums. For example, while closely held companies may have high liquidity challenges, this characteristic does not directly relate to the valuation issue posed by blockage premiums. Additionally, the sentiments investors hold regarding their shares can vary widely and do not provide a basis for the absence of a blockage premium. Thus, the lack of prevailing market prices is the critical reason for the inapplicability of blockage premiums