Does NYSE Listing Affect Firm Visibility? - Statistical Data Included

Financial Management (Financial Management Association), Summer, 1999 by H. Kent Baker, Gary E. Powell, Daniel G. Weaver

Over the past several years, the listing wars have reignited. As Nasdaq tries to recover from the negative publicity that arose from SEC and Justice Department investigations of the market's trading practices, the New York Stock Exchange (NYSE) has renewed its attempt to lure large Nasdaq Stock Market companies to the Big Board.(1) Indeed, several premier Nasdaq stocks, including America Online, Pioneer Hi-Bred International, Inc., and Roadway Services, Inc., have announced defections to the Big Board.

Both managers and financial academics offer various reasons for why firms move from one trading venue to another. These motives include management's desire to improve a firm's visibility and prestige, to signal its confidence in the firm's future performance, and to improve liquidity and marketability when a common stock begins trading on an organized exchange. In a survey of firms that moved from Nasdaq to the NYSE, Baker and Johnson (1990) find that managers of NYSE firms ranked improved visibility as the most important reason for listing. For example, in announcing their firm's move to the NYSE, managers of Roadway Services, Inc. said they hoped for "greater visibility in the investment community."(2) Thus, many managers believe that after listing, their firm will gain additional attention from financial analysts and the investing public.

A study by Dharan and Ikenberry (1995) suggests that some managers time their firm's initial listing application. That is, managers fear that even though their firm is currently able to meet the exchange listing requirements (e.g., earnings and market capitalization) future performance could decline below the required standards. Dharan and Ikenberry and others (Sanger and McConnell, 1986; and Cowan, Carter, Dark, and Singh, 1992) report that firms experience several years of very strong growth just before listing. Strong-growth firms might attract analysts and institutions, regardless of the listing decision.

The purpose of this study is to examine empirically the link between exchange listing and firm visibility. We define firm visibility as the extent to which analysts follow, and institutions hold, a firm's stock. We test whether firm visibility increases for firms that leave Nasdaq and list on the NYSE, and if so whether listing, changes in firm value, or earnings growth are the determining factors. We find that although NYSE listing is associated with increases in visibility, the gains appear to be associated with changes in firm size and earnings growth, rather than switching from Nasdaq to the NYSE. In addition, an inverse relation apparently exists between firm size and visibility gains. This evidenced by the number of institutions that owns shares in the firm, and the number of shares held by institutions.

The paper is organized as follows. Section I describes the importance of visibility and provides a brief review of the literature. Section II presents our three testable hypotheses. Section III describes our sample and the tests we use to determine whether visibility changes are associated with listing. Section IV presents our empirical findings. Section V presents a summary and implications.

I. Literature Review

Visibility is important to firms for two major reasons. First, it suggests greater flow and accessibility of information about a firm. Such information can draw the investment community's attention to the company and increased visibility could reduce uncertainty about the firm's prospects. (For example, Barry and Brown (1986) view limited information as a source of risk.) Second, visibility could enhance the efficiency of the trading market in the stock by reducing information asymmetries.

Researchers often refer to low-visibility firms as "neglected" and define a neglected firm as one that is under less scrutiny by news agencies, financial analysts, and institutional investors than are other firms. According to Bhardwaj and Brooks (1992), lower visibility creates greater information asymmetry between outside investors, managers, and insiders. Because of these information asymmetries, outsiders who invest in neglected firms face the possibility of higher monitoring costs, and a greater chance of larger wealth transfers to managers and insiders, than do outside investors in high-visibility firms. Low-visibility securities might offer premiums as compensation for associated information deficiencies, which leads to pricing inefficiencies. For example, Arbel, Carvell, and Strebel (1983) and Arbel (1985) offer evidence of positive excess returns on neglected stocks.

Newly listed firms can gain increased visibility in several ways. For example, exchange listing might create greater media coverage. However, the existing research on the relation between exchange listing and media visibility is dated and conflicting. Baker and Spitzfaden (1982) examine differences in media visibility from 1978 to 1980 between listed stocks and similar Nasdaq stocks. They find that AMEX-listed, but not NYSE-listed, stocks receive more news coverage than similar Nasdaq stocks.