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From Pink Slips to Pink Sheets: Liquidity and Shareholder Wealth Consequences of Nasdaq Delistings

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Author Info

  • Angel, James J.

    (Georgetown U)

  • Harris, Jeffrey H.

    (U of Delaware)

  • Panchapagesan, Venkatesh

    (Washington U-St Louis)

  • Werner, Ingrid

    (Ohio State U)

Abstract

If liquidity is priced, as suggested by Amihud and Mendelson (1986) and Acharya and Pedersen (2004), shareholders of firms that experience drastic declines in liquidity should experience a significant decline in their wealth. We first hypothesize and confirm that an involuntary delisting is associated with a large decline in liquidity. The deterioration in liquidity is significant: share volume declines by two-thirds; quoted spreads almost triple from 12.1 to 33.6 percent; effective spreads triple from 3.3 to 9.9 percent; and volatility more than triples from 4.4 to 14.3 percent. We then hypothesize and confirm that this liquidity decline is associated with a significant loss of shareholder wealth. Shareholders in our sample experience a wealth-loss of 19 percent on average due to delisting. We further test and find that the decline in liquidity and loss in shareholder wealth are related to the severity of the listing violation and to how far down the market hierarchy the firm is pushed during delisting.

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File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2004/2004-22.pdf
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Bibliographic Info

Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2004-22.

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Date of creation: Nov 2004
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Handle: RePEc:ecl:ohidic:2004-22

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  1. Barclay, Michael J., 1997. "Bid-ask spreads and the avoidance of odd-eighth quotes on Nasdaq: An examination of exchange listings," Journal of Financial Economics, Elsevier, vol. 45(1), pages 35-60, July.
  2. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
  3. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
  4. Pástor, Luboš & Stambaugh, Robert F, 2002. "Liquidity Risk and Expected Stock Returns," CEPR Discussion Papers 3494, C.E.P.R. Discussion Papers.
  5. Leuz, Christian & Triantis, Alexander & Yue Wang, Tracy, 2008. "Why do firms go dark? Causes and economic consequences of voluntary SEC deregistrations," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 181-208, August.
  6. Viral V. Acharya & Lasse Heje Pedersen, 2004. "Asset Pricing with Liquidity Risk," NBER Working Papers 10814, National Bureau of Economic Research, Inc.
  7. Glosten, Lawrence R. & Harris, Lawrence E., 1988. "Estimating the components of the bid/ask spread," Journal of Financial Economics, Elsevier, vol. 21(1), pages 123-142, May.
  8. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
  9. David Easley & Soeren Hvidkjaer & Maureen O'Hara, 2002. "Is Information Risk a Determinant of Asset Returns?," Journal of Finance, American Finance Association, vol. 57(5), pages 2185-2221, October.
  10. Macey, Jonathan R. & O'Hara, Maureen, 2002. "The Economics of Stock Exchange Listing Fees and Listing Requirements," Journal of Financial Intermediation, Elsevier, vol. 11(3), pages 297-319, July.
  11. Christie William G. & Huang Roger D., 1994. "Market Structures and Liquidity: A Transactions Data Study of Exchange Listings," Journal of Financial Intermediation, Elsevier, vol. 3(3), pages 300-326, June.
  12. Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, vol. 8(3), pages 205-258, September.
  13. Tarun Chordia, 2001. "Market Liquidity and Trading Activity," Journal of Finance, American Finance Association, vol. 56(2), pages 501-530, 04.
  14. Clyde, Paul & Schultz, Paul & Zaman, Mir, 1997. " Trading Costs and Exchange Delisting: The Case of Firms That Voluntarily Move from the American Stock Exchange to the Nasdaq," Journal of Finance, American Finance Association, vol. 52(5), pages 2103-12, December.
  15. Bessembinder, Hendrik, 1999. "Trade Execution Costs on NASDAQ and the NYSE: A Post-Reform Comparison," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(03), pages 387-407, September.
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Cited by:
  1. Bollen, Nicolas P.B. & Christie, William G., 2009. "Market microstructure of the Pink Sheets," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1326-1339, July.

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