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Down and Out in the Stock Market: The Law and Economics of the Delisting Process

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  • Jonathan Macey
  • Maureen O'Hara
  • David Pompilio
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    Abstract

    Since 1995, more than 9,000 firms have delisted from U.S. stock markets, with almost half of these being involuntary. This paper examines the law and economics of the delisting process. We examine economic rationales for delisting, the legal rules that define it, and the causes of delisting. Using a sample of New York Stock Exchange firms delisted in 2002, we examine the effects of their delisting and subsequent trading on the Pink Sheets. We find huge costs to delisting, with percentage spreads tripling and volatility doubling but with volume being remarkably high. We also show that actual delisting times vary considerably, with some firms trading for months after failing the listing requirements. With exchanges transitioning to profit-seeking status, we argue that the current delisting process also needs to change, and we suggest properties of an optimal delisting rule and approaches to achieve it. (c) 2008 by The University of Chicago. All rights reserved..

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    File URL: http://www.journals.uchicago.edu/doi/pdf/10.1086/593386
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    Bibliographic Info

    Article provided by University of Chicago Press in its journal The Journal of Law and Economics.

    Volume (Year): 51 (2008)
    Issue (Month): 4 (November)
    Pages: 683-713

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    Handle: RePEc:ucp:jlawec:v:51:y:2008:i:4:p:683-713

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    Web page: http://www.journals.uchicago.edu/JLE/

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    Cited by:
    1. Kashefi Pour, Eilnaz & Lasfer, Meziane, 2013. "Why do companies delist voluntarily from the stock market?," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4850-4860.
    2. Constant Djama & Isabelle Martinez & Stéphanie Serve, 2012. "What do we know about delistings? A survey of the literature," Post-Print hal-00937899, HAL.
    3. Isabel Feito-Ruiz & Clara Cardone-Riportella & Susana Menéndez-Requejo, 2014. "SMEs’ Delisting Decisions on the Alternative Investment Market (AIM): Family Holders and Financial Crisis," Working Papers 14.02, Universidad Pablo de Olavide, Department of Financial Economics and Accounting (former Department of Business Administration).
    4. Constant Djama & Isabelle Martinez & Stéphanie Serve, 2012. "What do we know about delistings? A survey of the literature," THEMA Working Papers 2012-38, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    5. Bakke, Tor-Erik & Jens, Candace E. & Whited, Toni M., 2012. "The real effects of delisting: Evidence from a regression discontinuity design," Finance Research Letters, Elsevier, vol. 9(4), pages 183-193.
    6. Rhee, S. Ghon & Wu, Feng, 2012. "Anything wrong with breaking a buck? An empirical evaluation of NASDAQ's $1 minimum bid price maintenance criterion," Journal of Financial Markets, Elsevier, vol. 15(2), pages 258-285.
    7. Chaplinsky, Susan & Ramchand, Latha, 2012. "What drives delistings of foreign firms from U.S. Exchanges?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(5), pages 1126-1148.

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