Listing Change and Stock Price: Impact of Shareholder Diversification and Changes in Liquidity

When a firm switches its listing venue, there is often a significant increase in the number of shareholders and the trading activities. According to Merton [1987], an increased shareholder base improves diversification of risk, which has a positive impact on the stock price. Amihud and Mendelson [1986] state that improvement in liquidity also has a positive impact on stock price. Most existing research dealt with cases where NASDAQ-listed stocks migrated their listing to the New York Stock Exchange or other exchanges in the U.S.; however, in these cases, it is difficult to extract the pure impact resulted from the increase in the shareholder base because the switching trading mechanisms occur simultaneously. On Japan Securities Dealers Association automated Quotation (JASDAQ) and the Tokyo Stock Exchange (TSE), analyzed in this study, most of stocks are traded under the same order-driven mechanism in either exchanges, and therefore we don't have any effects originated from difference of trading mechanism. This study measured cumulative abnormal returns (CARs) over the period between the listing change announcement date and the actual date of listing migration for stocks that moved from JASDAQ to the TSE from 1999 to 2002. Our findings confirmed a correlation between CARs and the effect of shareholder diversification. However, this relation is seen only in the stocks transferred to TSE Section I; such relation with the effect of shareholder diversification was not really evident for the stocks transferred to TSE Section II. For stocks transferred to TSE Section I, yen-based trading volume increased noticeably following announcement of listing change, suggesting that such a change is an important factor in stimulating trading that is consistent with current understanding. Also, relatively low abnormal returns were observed for stocks stocked by firms that carried out a public offering or secondary distribution concurrently with listing change in order to satisfy the required number of shareholders. This result shows that changes in abnormal returns and volume are not simply a result of the shift of listing from JASDAQ to the TSE, but are also stimulated by both the transfer process itself and post-transfer trading performance. Empirical results of this study regarding the application procedure for listing change show that public offering/secondary distribution immediately before listing change tends to have a negative impact on the stock price and volume. This suggests the need for appropriate consideration of such impact when making an application for listing change without satisfying the required number of shareholders.