IPO Listings: Where and Why?
Anderson, Anne M., Dyl, Edward A., Financial Management
According to most research, firms benefit from being listed on the New York Stock Exchange (NYSE). Nevertheless, 224 of 640 firms that went public from 1993 through 2000 and were eligible for a NYSE listing chose to list their stock on Nasdaq. We hypothesize that this choice may be related to Securities and Exchange Commission (SEC) Rule 144. The rule regulates the sale of restricted stock by limiting the amount of unregistered stock that can be sold by an individual. We investigate the determinants of post-IPO sales of restricted stock, examine IPO firms' listing choices, and find evidence consistent with firms selecting Nasdaq to reduce the effect of the limits on selling restricted stock imposed by the SEC's Rule 144. Venture capitalists play an important role in this listing decision.
Most research agrees that firms benefit from listing their stock on the New York Stock Exchange (NYSE). Kadlec and McConnell (1994) and, more recently, Jain and Kim (2006) find that share prices rise when firms move from Nasdaq to the NYSE. Nonetheless, not all firms that are eligible to list on the NYSE choose to do so. Cowan, Carter, Dark, and Singh (1992) report that many Nasdaq firms that qualify to list on the NYSE remain on Nasdaq. Corwin and Harris (2001) show that from 1991 to 1996 more than 20% of the companies that qualified for listing on the NYSE at the time of their initial public offering (IPO), decided to trade on Nasdaq instead.
We examine possible reasons for IPO firms to select Nasdaq over the NYSE, controlling for characteristics of the firm such as its size, the volatility of its common stock, and whether or not it is classified as a high-technology firm. We consider the motives of the founders, venture capitalists, and other pre-IPO investors who choose where the stock will trade after the IPO. We focus on whether some firms choose to list their stock on Nasdaq, rather than on the NYSE, to obtain more advantageous regulatory treatment under Securities and Exchange Commission (SEC) Rule 144, which governs post-IPO sales of restricted stock. Investors who own the stock before the IPO can reduce the effect of Rule 144's restrictions by choosing to have their stock traded on Nasdaq rather than on the NYSE.
We investigate the relation between post-IPO sales of restricted stock and the listing decisions of IPO firms from 1993 through 2000, controlling for the other factors that are relevant to the exchange listing decision. We find that of the 640 IPO firms that are eligible to list on the NYSE from 1993 to 2000, 35% choose instead to list on the Nasdaq, compared to only 23% of the 438 IPO firms eligible for the NYSE that Corwin and Harris (2001) report for 1991-1996. Firms that choose to list on the Nasdaq are smaller than those that opt for the NYSE and are more concentrated in the high-tech sector. Of the firms that choose Nasdaq, 64% have sales of restricted stock during the two-year period following the IPO, compared to only 39.8% of the firms that choose the NYSE. Post-IPO sales of restricted stock are higher for volatile firms, for venture capital (VC)-backed firms, and for firms go public after 1997, but not for firms that sell more secondary shares in the IPO, for firms that went public in hot markets, for firms that have larger post-IPO stock price appreciation, or for firms with greater top management ownership.
When we use logistic regressions to model firms' listing decisions and control for firm size, underwriter quality, and membership in a technology industry, we find that venture capitalists are a major influence behind firms' choice of Nasdaq instead of the NYSE. We also use the number of restricted shares sold during the two years following the IPO as a general proxy for pre-IPO investors selling intentions, and find that post-IPO stock sales are strongly related to the listing decision and are higher for firms that choose Nasdaq. Our interpretation of these results is that venture capitalists and other pre-IPO investors who intend to sell more shares are motivated to choose Nasdaq. …