Liu, Karen, The Real Effects of NASDAQ Delistings (November 14, 2016). Available for download at SSRN: https://ssrn.com/abstract=2893493

“It is claimed that exchange listing of its stock benefits a firm by improving its stock liquidity and access to capital, thereby affecting real decisions and consequent outcome variables. Testing this claim empirically encounters obvious and formidable endogeneity problems. This paper empirically examines the causal effect of involuntary delisting from a stock exchange on stock liquidity, access to capital, corporate investment and profitability. Focusing on firms in violation of NASDAQ continued-listing rules between 2000 and 2009, I compare firms that eventually delisted and moved trading of their stock to OTC markets with those that regained compliance and remained on NASDAQ. Market volatility during the delisting grace period is used as an instrumental variable (IV) for the delisting outcome. My findings suggest the following: First, delisting causes stocks to experience reduced daily trading volume, but only if the stock was actively traded prior to delisting; for thinly-traded stocks, there is no effect. Second, surprisingly, the number of investors, institutional ownership or analyst coverage are not affected by delisting. Third, delisting leads to less future equity issuance only if a stock was actively traded prior to delisting. Fourth, delisting has no statistically significant effect on a firm’s long-term investments. Fifth, delisting improves long-term gross margin for firms which were thinly-traded prior to delisting. Sixth, delisting does not have statistically significant effect on firm value. Overall, my findings indicate that delisting from a stock exchange is not as costly as commonly believed. This implies that the OTC markets may provide small firms that have limited trading volume with a low-cost, effective market for their stock. My conclusions support the recent policy initiations to provide alternative listing and trading venues for small public companies.”