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

  • Jonathan Macey
  • Maureen O'Hara
  • David Pompilio
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    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://dx.doi.org/10.1086/593386
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    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
    Contact details of provider: Web page: http://www.journals.uchicago.edu/JLE/

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    1. Fama, Eugene F. & French, Kenneth R., 2004. "New lists: Fundamentals and survival rates," Journal of Financial Economics, Elsevier, vol. 73(2), pages 229-269, August.
    2. Shumway, Tyler, 1997. " The Delisting Bias in CRSP Data," Journal of Finance, American Finance Association, vol. 52(1), pages 327-40, March.
    3. Tyler Shumway & Vincent A. Warther, 1999. "The Delisting Bias in CRSP's Nasdaq Data and Its Implications for the Size Effect," Journal of Finance, American Finance Association, vol. 54(6), pages 2361-2379, December.
    4. Brian J. Bushee & Christian Leuz, 2003. "Economic Consequences of SEC Disclosure Regulation," Center for Financial Institutions Working Papers 02-24, Wharton School Center for Financial Institutions, University of Pennsylvania.
    5. Lie, Erik & Lie, Heidi J. & McConnell, John J., 2001. "Debt-reducing exchange offers," Journal of Corporate Finance, Elsevier, vol. 7(2), pages 179-207, June.
    6. Sanger, Gary C. & Peterson, James D., 1990. "An Empirical Analysis of Common Stock Delistings," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(02), pages 261-272, June.
    7. 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.
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