Down and Out in the Stock Market: The Law and Finance of the Delisting Process

Since 1995 more than 7300 firms have delisted from U.S. stock markets, with almost half of these being involuntary. This paper examines the law and finance of the delisting process. We examine economic rationales for delisting, the legal rules that define it, and the causes of delisting. Using a sample of NYSE firms delisted in 2002, we examine the effects of their delisting and subsequent trading on the Pink Sheets. We find huge costs to delisting, with percentage spreads tripling, volatility doubling, but volume remarkably high. We also show that delisting is applied inconsistently, with some firms trading for months after failing the listing requirements. We argue that the current delisting process is flawed, and we provide some alternatives.