The Effect of Market Segmentation and Illiquidity on Asset Prices: Evidence from Exchange Listings

This article documents the effect on share value of listing on the New York Stock Exchange and reports the results of a joint test of Robert C. Merton's (1987) investor recognition factor and Yakov Amihud and Haim Mendelson's (1986) liquidity factor as explanations of the change in share value. The authors find that, during the 1980s, stocks earned abnormal returns of 5 percent in response to the listing announcement and that listing is associated with an increase in the number of shareholders and a reduction in bid-ask spreads. Cross-sectional regressions provide support for both investor recognition and liquidity as sources of value from exchange listing. Copyright 1994 by American Finance Association.

[1]  E. Fama,et al.  The Adjustment of Stock Prices to New Information , 1969 .

[2]  H. Demsetz,et al.  The Cost of Transacting , 1968 .

[3]  Marc R. Reinganum.  Market microstructure and asset pricing: An empirical investigation of NYSE and NASDAQ securities , 1990 .

[4]  R. C. Merton,et al.  Presidential Address: A simple model of capital market equilibrium with incomplete information , 1987 .

[5]  James L. Hamilton.  Marketplace Fragmentation, Competition, and the Efficiency of the Stock Exchange , 1979 .

[6]  Hans R. Stoll,et al.  Transaction costs and the small firm effect , 1983 .

[7]  Wilbur G. Lewellen,et al.  Stock Exchange Listings and Securities Returns , 1977, Journal of Financial and Quantitative Analysis.

[8]  John J. McConnell,et al.  Stock Exchange Listings, Firm Value, and Security Market Efficiency: The Impact of NASDAQ , 1986, Journal of Financial and Quantitative Analysis.

[9]  V. Barnett,et al.  Applied Linear Statistical Models , 1975 .

[10]  Haim Mendelson,et al.  The Effects of Beta, Bid-Ask Spread, Residual Risk, and Size on Stock Returns , 1989 .

[11]  Gary C. Sanger,et al.  The Puzzle in Post‐Listing Common Stock Returns , 1987 .

[12]  Robert C. Klemkosky,et al.  Competition and the cost of liquidity to investors , 1985 .

[13]  James L. Hamilton.  Competition, Scale Economies, and Transaction Cost in the Stock Market , 1976, Journal of Financial and Quantitative Analysis.

[14]  Ashutosh Kumar Singh,et al.  Explaining the NYSE Listing Choices of NASDAQ Firms , 1992 .

[15]  Waldemar M. Goulet.  Price Changes, Managerial Actions and Insider Trading at the Time of Listing , 1974 .

[16]  James L. Hamilton.  MARKETPLACE ORGANIZATION AND MARKETABILITY: NASDAQ, THE STOCK EXCHANGE, AND THE NATIONAL MARKET SYSTEM , 1978 .

[17]  R. R. West,et al.  Marketability of Common Stocks in Canada and the U.S.A.: A Comparison of Agent versus Dealer Dominated Markets , 1974 .