FIN-04-005 |
NYU Stern School of Business |
March 2004 Revised November 2004
Shmuel Baruch and Gideon Saar
ABSTRACT
We propose a mechanism that relates asset returns to the firm's optimal listing choice. The crucial element
in our framework is not a difference in the structure or rules of the alternative markets, but a difference
in the return patterns of the securities that are traded on these markets. We use a simple trading model with
asymmetric information to show that a stock would be more liquid when it is listed on a market with "similar"
securities, or securities with correlated payoff patterns. We empirically examine the implications of our model
using NYSE and Nasdaq securities, and document that the return patterns of stocks listed on the NYSE indeed
look different from the return patterns of Nasdaq stocks. Stocks that are eligible to list on another market
but do not switch have return patterns that are similar to other securities on their own market and different
from securities listed on the other market. We show that the return patterns of stocks that switch markets
change in the two years prior to the move in the direction of being more similar to the stocks on the new
market. Our results are consistent with the notion that managers choose the market on which to list to maximize
the liquidity of their stocks.
Shmuel Baruch
Institution: David Eccles School of Business, University of Utah, Salt Lake City, UT
84112
Telephone: 801-581-7683
Email: finsb@business.utah.edu
Gideon Saar
Institution: Leonard N. Stern School of Business, New York University
Telephone: 212-998-0318
Fax: 212-995-4233
Email: gsaar@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~gsaar
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