Why Companies Do Not Seek Exchange Listing(*)
Traditionally, listing on the New York Stock Exchange (NYSE) or the American Stock Exchange (AMEX) has been viewed as a milestone in the corporate life cycle. According to Cooney, however, an increasing number of firms that qualify for listing on these exchanges are choosing to remain on the National Association of Securities Dealers Automated Quotation (NASDAQ) system.(1)
In recent years several articles have appeared in the financial press both heralding the boom at NASDAQ[6, 15] and predicting the decline and even the demise of the trading floor[11, 19].(2) The stigma that once accompanied a stock's being traded on the over-the-counter (OTC) market has faded, and more institutions are investing in OTC stocks. The development of a highly sophisticated computer network at NASDAQ has promoted its image as the market on the leading edge of technology. In fact, Winder contends that the development of the market floor is at the same stage now that the Swiss watch was in 1970--that is, on the brink of obsolescence.
In addition to the absence of a trading floor, the use of the multiple market-maker system is probably the most distinguishing feature of the NASDAQsystem vis-a-vis the exchanges. In fact, Baker and Pettit report that the primary reason in 1979 for choosing to remain on NASDAQ was a preference for the multiple market-maker system versus specialists on the exchanges.
An argument favoring the multiple market-maker system is that the competition created by the buying and selling of securities by several market makers results in a better price than the "monopoly" specialist system of the exchanges. In response to the competitive pressure created by the NASDAQ and its market-maker system, AMEX began allowing its listed firms in 1984 a choice of specialists as well as the opportunity to change specialists if firms were not satisfied with the performance of their first selection.
Several developments within NASDAQ help to explain its increased popularity. Perhaps the most important development was the advent of the National Market System (NMS) in 1982. The NMS is a market within a market that provides continuous last-sale and volume information throughout the trading day on approximately 3,000 securities. Thus, the introduction of the NMS significantly narrowed the gap in the availability of market information that existed between listedand unlisted companies. For example, The Wall Street Journal and many other newspapers have given identical quotation treatment to the three major markets--NYSE, AMEX, and NASDAQ/NMS. In addition, Freedman and Rosenbaum report that the NASDAQ market has gained a certain kind of prestige of its own, especially among high-technology firms.
In their effort to attract new listings, the exchanges claim that they can offer economic and other advantages to publicly traded firms. Recent academic studies show, however, that listing on a national exchange does not necessarily provide such economic benefits as more efficient pricing for a company's stock[10, 18, 20], reduced systematic risk[8, 17], improved liquidity/marketability[5, 7, 12], and a lower cost of equity capital[2, 16]. These findings generally support the idea that remaining on the NASDAQ/NMS, even if qualified to list on an exchange, is a reasonable, possibly optimal, corporate strategy for many firms.
The purpose of this research is twofold: (1) to examine empirically the managerial motivations behind choosing not to list on a national exchange and(2) to determine whether these motives have changed over time. The results of the current study are compared with those of a similar survey conducted in 1981 by Baker and Pettit.
The study centers on updating and expanding Baker and Pettit's research involving the motives behind OTC firms not seeking listing and managers' views on listing issues. Considering the widespread expansion of the NMS, the continuing acceleration of NASDAQ's popularity, and the countermeasures being taken by the exchanges, managers may have changed their views toward listing. …