Competition versus Consolidation of Order Flow: Common Stock Listing on Dual Domestic Exchanges

Article excerpt

INTRODUCTION

Firms often list their common stock on a regional exchange before moving to a national exchange because the listing requirements are less stringent. Some firms with stock listed on the American Stock Exchange (AMEX) or the New York Stock Exchange (NYSE) later have listed dually on one or more regional stock exchanges. Although many researchers have examined the effects of listing on a national exchange, dual domestic listing is largely unexplored.(1)

An exception is a study by Khan, Baker, Kennedy, and Perry (1993). They examine the value impact of dually listed firms on the Pacific and Midwest Stock Exchanges from 1984 to 1988. Although the Khan, Baker, Kennedy, and Perry study finds no significant market reaction on the dual listing day, it reports significantly negative abnormal returns after dual listing. The study examines only 30 trading days in the postlisting period. The study concludes that dual listing has negative valuation implications and that management should question dual listing.

Given its exploratory nature, the Khan, Baker, Kennedy, and Perry study does not consider whether market participants react differently to dual listing based on certain prelisting characteristics such as liquidity. Thus, the negative postlisting market response to dual listing may apply only to a subsample of stocks, not to all dually listed stocks. Their study also does not examine the issue of whether liquidity changes as a result of dual listing by altering the trading structure from a monopoly specialist system of the AMEX and NYSE to a multispecialist system created by dual listing.

The current study extends the recent research on the microstructure of equity markets by analyzing the effects of dual listing on stock returns and liquidity. It also examines whether a postlisting anomaly exists after dual listing. This study is important because little empirical evidence exists about the effects of changing market structure through dual domestic listing. As Hasbrouck (1991, p. 14) notes, "microstructure analysis had not yet arrived at the point where we can assert a priori that a particular market structure will afford the most liquidity for a given security."

Besides being of academic interest, the current study has implications for market regulators. In 1975 the Securities and Exchange Commission and Congress created the National Market System (NMS) in which dually listed stocks trade. NMS was created to increase interdealer and intermarket competition and to enhance transactional efficiency of equity markets. This study provides evidence about whether increasing competition among specialists through dual listing enhances liquidity. Gerety, McMillan, and Mulherin (1991) note that market microstructure has become an important tool in gauging the effect of existing securities regulation.

The findings also should interest corporate managers and investors. Corporate managers, who are considering dually listing their firm's stock, may want to know if this decision affects the financial well-being of their common shareholders. Investors may want to know if dual listing provides an opportunity for achieving abnormal returns.

MARKET MICROSTRUCTURE ISSUES

According to Amihud and Mendelson (1988) and Hasbrouck (1991), many persons believed until recently that market arrangements had little relevance for securities returns. Now the various characteristics and differences among alternative market structures have attracted increasing interest among the academic community. Microstructure studies suggest that managers intent on increasing shareholder wealth should pay attention to the market arrangements by which their stock is traded.

The specialist structure is desirable for less liquid securities because the consolidation of the smaller order flow with one specialist reduces the fixed costs of market-making. Furthermore, the specialist reduces risk exposure by having greater flexibility in adjusting inventory due to absence of competing dealers. …