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

James J. Angel, Jeffrey Harris, Venkatesh Panchapagesan and Ingrid Werner
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James J. Angel: Georgetown U
Venkatesh Panchapagesan: Washington U-St Louis
Ingrid Werner: Ohio State U

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

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.

Date: 2004-11
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