The Initial Listing Decisions of Firms That Go Public

Abstract

We analyze the initial listing decisions of IPOs that qualify for New York Stock Exchange listing. We find that IPOs are more likely to list on the exchange where their industry peers are listed. Further, reverse LBOs and carveouts are more likely to choose the NYSE if the firm or their parent was previously NYSE-listed. Consistent with avoidance of delisting costs, we find that smaller, riskier firms tend to list on Nasdaq. Although direct issue costs are higher on the NYSE than on Nasdaq, total issue costs do not differ across exchanges and are unlikely to affect the listing decision. Historically, publicly held firms in the US began trading on the regional or over-the-counter markets and, in some cases, eventually moved to the New York Stock Exchange (NYSE). However, the NYSE changed its listing rules in 1983, making it easier for initial public offerings (IPOs) to meet minimum listing requirements. Now that many large IPOs could list directly on the NYSE, the initial listing decision became an important part of the IPO process. In this paper, we analyze the factors that affect the initial listing decision. We examine a sample of IPOs from 1991 to 1996 that either listed on the NYSE or met the NYSE's minimum-listing requirements, but chose to list on the Nasdaq National Market (Nasdaq). Our sample allows us to examine the initial listing decisions of firms for which NYSE listing was actually a consideration. Of the 438 IPOs that meet our sample criteria, 337 (76.9%) listed on the NYSE. The significant number of NYSE listings suggests that the change in listing rules and the NYSE's increased marketing efforts have had an important effect on the listing decisions of IPO firms. However, the fact that many NYSE-eligible IPOs continue to list on Nasdaq suggests that the perceived costs and benefits of listing vary across firms. We find that firms tend to list on the exchange where other firms in their industry are currently listed. In addition, reverse LBOs and carveouts are more likely to list on the NYSE if the firm or parent firm was listed on the NYSE prior to the LBO or carveout, respectively. These results suggest that prior exchange relationships and exchange expertise are important considerations in the choice of listing venue. Smaller, riskier firms are more likely to list on Nasdaq. This finding suggests that firms avoid expected delisting costs. The fact that small firms tend to list on Nasdaq may also suggest that sponsorship is an important factor in the listing decision. However, we find no evidence that younger firms, which would also benefit from sponsorship, are more likely to list on Nasdaq