Why do companies delist voluntarily from the stock market?

Eilnaz Kashefi Pour,Meziane Lasfer

doi:10.1016/j.jbankfin.2013.08.022

Eilnaz Kashefi Pour, Meziane Lasfer

Open Access

https://doi.org/10.1016/j.jbankfin.2013.08.022

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Abstract

We analyse the motives and market valuation of voluntarily delisting from the London Stock Exchange. We show that firms that delist voluntarily are likely to have come to the market to rebalance their leverage rather than to finance their growth opportunities. During their quotation life, their leverage and insider ownership remained very high, they did not raise equity capital, and their profitability, growth opportunities, and trading volume declined substantially. They also generate negative pre-event and announcement date excess returns. These results hold even after controlling for agency, asymmetric information, and liquidity effects, and suggest that firms delist voluntarily when they fail to benefit from listing. Overall, these firms destroyed shareholder value and they should not have come to the market.

Highlights

Over the last few years, an increasing number of quoted firms delist from the London’s Alternative Investment Market (AIM)
Over one year pre-event period, voluntary delisted firms, like firms that delist because of breach of regulation, generate significant negative returns of about 2%, compared to +14% for firms that transfer to the Main market
In non-tabulated results, we find that firms that transfer to the Main market and those which were taken over have relatively high leverage, but they have significantly higher capital expenditure intensity and market-to-book ratios than their respective control firms and our voluntarily delisted firms

Summary

Introduction

Over the last few years, an increasing number of quoted firms delist from the London’s Alternative Investment Market (AIM). Leverage of firms that transferred to the Main market did not change significantly over the two periods, and it is relatively similar to that of voluntary delisted firms, they maintained their high investments, growth opportunities, free cash flow and profitability, and their insider ownership is lower and declined over their listing period Their market value, stock turnover and trading volume increased significantly from their IPO to the delisting date. Overall, these results suggest that firms transfer to the Main market to finance their growth opportunities, and to mitigate their free cash flow problems, as in the Main market the corporate governance requirements are much higher that AIM’s. These results are in line with our findings from the univariate analysis, and suggest that firms delist voluntarily from AIM because of their inability to raise equity finance and to reduce their leverage

The regression results6

Conclusions

Delisting Method