Academic journal article Financial Management

Investor Recognition, Liquidity, and Exchange Listings in the Reformed Markets

Academic journal article Financial Management

Investor Recognition, Liquidity, and Exchange Listings in the Reformed Markets

Article excerpt

We examine multiple facets of firms' decisions to list on the NYSE. Although the average Nasdaq spreads are now comparable to the average NYSE spreads, we find that firms continue to switch from Nasdaq to the NYSE, and that they experience positive cumulative abnormal returns on listing. Using a simultaneous system of equations approach, we establish that enhanced investor recognition mainly explains this phenomenon. A logistic regression suggests that corporate listing choice is consistent with these findings, since eligible unlisted firms already have high volumes and recognition and might not benefit as much as do firms that actually switch.

Early evidence on trading costs suggested that on average, the NYSE had better market quality than did Nasdaq. Many studies on exchange switching found that trading costs declined and liquidity improved when firms switched from Nasdaq to the NYSE. Thus, these studies proposed that the reduction in trading cost was the main motivation behind exchange listing and the associated positive abnormal return. However, since the mid-1990s, technological advancements, increased competition, and regulatory changes have radically changed and reformed both exchanges. These developments warrant a fresh examination of the link between liquidity benefits and the positive abnormal returns associated with exchange listing.

Studies that use post-market-reform data find that the trading costs are now similar on the two markets. However, despite the declining liquidity benefits to switching, we observe that firms continue to switch. Why? If it is not trading costs, then could it be investor recognition, as suggested by Merton (1987)?

Our article examines the implications of exchange switching on stock price valuations, investor recognition, and liquidity. This integrated approach throws light on different types of listing benefits, various aspects of exchange competition, and optimal corporate policies on listing in the new environment.

We divide our sample into three periods: the first period covers the time before any of the major reforms; the second period follows the SEC's Order Handling Rules and Exchange Act Rules, but precedes decimalization of tick sizes; and the final period is that which follows all reforms, including decimalization. Thus, we highlight the changing dynamics of exchange competitiveness over time.

Although our main focus is on Nasdaq firms that switch to the NYSE, to obtain additional insights into the issue we also analyze the effects of switching from Amex to Nasdaq. Clyde, Schultz and Zaman (1997) find that liquidity declines for the latter sample, thus characterizing the switch as a puzzle. We test if changes in investor recognition in this sample can explain these switches and the accompanying positive abnormal returns.

The method we use in this article also enhances the rigor of the tests by using a controlled experiment framework. First, we look at the same firm before and after it switches, so we do not have the problem of comparing apples on one exchange to oranges on another. More importantly, we form a matched control sample of firms that do not switch exchanges. This approach provides robust results by controlling for the time-series variations in liquidity that result from changes in market structure and other factors unrelated to exchange listing.

Our analysis is based on a simultaneous system of equations in which we first test whether listing on the NYSE improves liquidity and investor recognition. In the second part of our analysis, we check whether improvements in liquidity and investor recognition, if any, can explain the cumulative abnormal return at the time of announcement.

Finally, we ask if listing is beneficial, then why do not all Nasdaq firms that meet the NYSE listing criteria switch? Do such eligible firms have some common characteristics that explain their listing choice? …

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