Research Methods in Finance

Introduction

This research is an event-time study of the OTC stocks that were listed over the period od 1966-1977 on the New York Stock Exchange (NYSE). This period was chosen because it covers an overview of the National Association of Securities Dealers Automatic Quotation (NASDAQ)'s communications system in the OTC market. During the pre-NASDAQ period, on average the stocks earned substantial abnormal positive returns in response to the listing announcements.

Whie during the post-NASDAQ period, abnormal returns in response to listing announcements are statistically quite lower than to those during the pre-NASDAQ period. These results are consistent with the hypothesis that NASDAQ has reduced the benefits affiliated with listing on a major stock exchange. Additionally, in both the pre- and post-NASDAQ periods, on the initial announcement of listing before listing actually occurs the stocks earn substantial positive abnormal returns, and they earn significant negative returns immediately after listing. These anomalies are explored and the results are shown to be insensitive to variations in empirical methodology.

The analysis provides direct evidence regarding the effect of a major stock exchange listing upon shareholders' wealth. The results also contain indirect implications regarding the economics of the trading process and market liquidity. The most frequently encountered hypothesis regarding the value of a major stock exchange listing argues that improved liquidity provided by exchange trading stimulates demand for a firm's stock, which, in turn, gives rise to a permanent increase in stock price. An opportunity to test the liquidity hypothesis was provided by the introduction of the National Association of Securities Dealers Automatic Quotation (NASDAQ) communications system in the OTC market in February 1971.

Procedure for Listing on the NYSE

A detailed sequence of procedures must be followed by a company to obtain a listing on the NYSE.

The steps involved in the listing procedure suggest three dates around which security returns should be examined: (1) the official announcement by the Exchange that a formal application has been filed, (2) the date on which approval is granted, and (3) the actual listing date.

Comparing Returns in the pre- and post-NASDAQ Periods

The tests clearly indicate that there is a significant initial announcement effect associated with listing in the pre-NASDAQ period, but not in the post-NASDAQ period.

As per traditional hypothesis of market efficiency, the proper test is to compare securities returns in the announcement period only. However, if it is assumed that event of listing has an impact that exceeds beyond the announcement period then test periods needs to be extended