Economic Consequences of Stock Exchange Section Switching: Evidence from NYSE-Euronext Paris

Abstract The phenomenon of stock market section transfer is very little documented in literature. Its consequences have to be explored in deeper way, especially in the case where transfer decision is voluntary like in NYSEEuronext Paris. Managers, by deciding to change the trading market of their common stocks on a more important compartment, think that this operation will create value by allowing them to improve their stock liquidity and to raise capital in lesser cost. In this article, we examine the market reaction during the period around a trading compartment switching. The results of our various analyses show a positive market reaction around the transfer announcement and an improvement of the liquidity level of switched stocks after that date. But after admission in the new market section, the market reaction weakens strongly. Our ndings also reveal the existence of a link between stock price reaction to a compartment transfer and their pretransfer liquidity level. Finally, our study highlights that this kind of transfer reduces the returns volatility of the switched stocks and also reduces their specic risk, but has no signicant eect on their systematic risk. Keywords: Market section transfer, price reaction, liquidity eect, information asymmetry, event study. JEL classication: G12, G14.

Email addresses: cissea@upmf-grenoble.fr (A. K. Cisse), patrice.fontaine@eurofidai.org (P. Fontaine) Preprint submitted to Journal October 10, 2011

1. Introduction Trading section transfers within the same stock exchange are becoming an increasingly important strategic issue for companies and stock exchanges alike. The decision to switch the listing section is an important one and least studied questions in nancial literature. Previous studies have examined many issues about stock exchange listing, cross-listing, dual listing, and stock exchange transfer1 , but they have left almost unexplored the study of rms that moved their common stocks from one segment to another within the same stock exchange (i.e. transfer from NASDAQ Capital Market to NASDAQ Global Market or from Section 2 to Section 1 of the Tokyo Stock Exchange (TSE)). As far as we know, the only studies published on the transfer of compartment are by Baker and Edelman (1990) and Lamba and Ari (1997). Thus the consequences of this kind of market transfer are littledocumented in the literature. One could argue that stock exchange compartment transfer is not far dierent from a stock exchange switching, cross-listing or a stock exchange listing, hence it should almost have the same consequences as these operations. Contrary to what one might think, compartment transfer is dierent from cross-listing because it does not involve any home bias, cultural and legal barriers problems. Furthermore, contrary to stock exchange transfer, compartment transfer is made between two markets with close functioning rule and managed by the same authority, therefore, it constitutes an ideal framework to study whether market quality is remunerated by investors. In NYSE-Euronext Paris, between 2002 and 2010, in average, about 12% of IPO were transfers. This gure rose to 32% for the year 2010. Despite this importance of compartment transfer in NYSE-Euronext Paris, there is no study, as far as we know, concerned with this issue in Europe. Bacmann et al. (2002) examined and discussed the market reaction when stocks were listed on the most important segment of the French Stock Market. But, the type of transfer they analyzed is rather a change in trading mechanism. Besides, the characteristics of compartment transfer operation in NYSEEuronext are dierent from those of other stock markets. Indeed, contrary to NASDAQ and TSE, the decision of compartment switching in NYSEEuronext is a voluntary one. What raises the question to know why certain
Transfer made between two independent stock markets from the same country, for instance, transfer from NASDAQ to NYSE.
1

companies decide to transfer their stocks and others, although they fulll all conditions to transfer, decide to not do it. It also poses the question to know if the market reaction will dier from those observed in stocks markets where stocks are automatically transfered. To understand the decision of switched companies and to complement the literature, in this article, we attempt to investigate the possible consequences of the transfer from a non or less regulated market section to a more regulated one. In other words, we analyze whether it is interesting for companies already listed on a nancial market, but which are listed on a small market/compartment, and fullling all the admission conditions on a more regulated market to proceed to a transfer operation. According to the literature on this subject, transfer to a more regulated market should be welcomed favorably by the market. Indeed, through such an operation, the managers (CEOs) send a signal to the nancial markets in terms of their condence in their rms future prospects. Consequently, if the market perceives this market section transfer as a signal of quality improvement (among other things), it might react favorably to the announcement. Besides, transfer to a more regulated market entails some major changes: increase of visibility, reinforcement of information disclosure obligations, change in trading mechanism and process of discovery of prices as well as improvement of the guarantees and security extended to all shareholders. According to the theories, these various changes positively impact the value of the migrating companies through a reduction of their level of information asymmetry. It also reduces investor valuation risks for the securities, owing to improved estimation precision of future cash ows. The supposed reduction of transaction costs and of informative risks should result in an increased demand for the transferred securities, thus aecting their liquidity level positively and ceteris paribus, resulting in a decrease of the cost of capital for the migrating companies. The eect of stock exchange switching on returns and liquidity of the common stock shares around the time at which stocks start listing on a major stock exchange has drawn a great deal of academic researchers attention2 . A common pattern in stock returns found in most of these studies
See Ule (1937); Ying et al. (1977); Grammatikos and Papaioannou (1986b,a); McConnell and Sanger (1987); Sanger and McConnell (1986); Baker and Edelman (1992a,b); Edelman and Baker (1990); Kadlec and McConnell (1994); Clyde et al. (1997); Tse and Devos (2004).
2

is that the stock price rises immediately prior to listing, then declines immediately thereafter, though the time periods covered in dierent studies vary. Furthermore, these studies reveal that the gains of liquidity expected by companies (during a transfer towards a superior-quality market) depend strongly on their level of liquidity before the announcement of the transfer. In fact, these expected gains of liquidity are all the more important when the level of liquidity of the company stocks before the transfer is low and vice versa. Concerning the impact of market transfer on risk or on the cost of capital, all the studies (expect Dhaliwal, 1983) which analyzed these eects are unanimous: admission on a new market does not aect risk. Empirical studies on the transfer of market section within the same stock exchange (Baker and Edelman, 1990; Lamba and Ari, 1997) are all interested in its impact on return and liquidity. They also use event study methodology, using market index as a benchmark to estimate the market reaction in terms of abnormal return. Globally, the results of these studies bring to light on one hand, that the market reacts favorably to the announcement of a transfer of compartment and on the other hand, that the transferred stocks performance declines after their admission to the new compartment. To investigate the various eects of compartment transfer behavior of rms, this paper intends to answer the following primary inquiries. First, what is the eect of compartment switching from non or less regulated compartment of NYSE-Euronext Paris to a more regulated one on stock returns? Second, how are trading activities, such as trading volumes, and stock price volatility, aected by the transfer? Third, is there any dierence in the liquidity and volatility prior to and following switching? This paper contributes to the debate by estimating and then interpreting the eects of market section transfer on price, liquidity and especially on risk. It dierentiates itself from previous studies by examining the compartment transfer phenomenon on an order-driven stock market (NYSE-Euronext Paris) where the decision of transfer is voluntary3 . Analyzing the eect of a section switching on an order-driven market is not new. Lamba and Ari (1997) studied the information content of rms switching from section 2 to section 1 of the TSE which is an order-driven market. However the switching procedure on TSE is involuntary.
Previous studies on stock exchange section transfer (Baker and Edelman, 1990; Lamba and Ari, 1997) concerned involuntary switching.
3

The methodology used to measure the eects is also unique: contrary to the studies of Baker and Edelman (1990) and Lamba and Ari (1997) who use market index only as benchmark, in addition to this we use an another methodology which consists of an operation matching every transferred stock with a portfolio of securities remaining listed on the market compartment of departure and practicing in the same business sector. The studies that use a market index as benchmark are necessary, however, they present a certain number of inadequacies. In fact, these studies measure the abnormal returns of the migrant stocks that were listed on a small market with regard to listed stocks on a greater and very visible market. Consequently, to study the performance of small market securities compared to a market index can, in certain cases, end up providing biased results. For this reason, we opted for an additional methodology: constitution of a control sample. This technique often used in empirical nance studies is advantageous for comparing companies of similar size, sector of activity and evolutionary environment. Moreover, contrary to the rst one, it does not assume any hypotheses on models supposed to determine stocks returns. Our study provides proof that the market reacts favorably to announcement of market section transfer. This positive reaction appears around the date of announcement and lasts approximately three weeks. A few days after NYSE-Euronext approval and just before the admission on the new market, the cumulative abnormal returns (CAR) enters a downward trend. We also noticed, globally, a signicant improvement of liquidity levels. Nevertheless, this increase is signicant for the high liquidity level group of securities only after the transfer. No relevant proof of signicant change of the systematic risk was noticed. This last result conrms the studies of Horne (1970), and Reints and Vandenberg (1975) realized on the American market. By comparing our transferred securities sample with the control sample, we found that the transferred securities have, on average, a better performance prior to the transfer announcement, but their average performance becomes lower than the control benchmark after the transfer. However, whatever the period, the transferred securities remain more liquid and less volatile than their comparable counterparts. The remainder of the paper is organized as follows. In section 2, we develop the theoretical and empirical arguments justifying the consequences expected from the market section transfer. Descriptions of NYSE-Euronext Paris structure and functioning and the data are presented in section 3. The results of our study are detailed and interpreted in section 4. Finally, we 5

summarize the ndings of this article in the last section. 2. The expected consequences from a stock exchange compartment transfer On some stock exchanges, like NYSE-Euronext, the decision to change listing compartments is a voluntary one taken by the candidate rms. By making this decision, the managers or the board of directors of these rms consider they are working in the general interest of their company and their shareholders. The transfer being very expensive for the company (fees and commissions paid to Investment Service Providers, stock exchange, auditors...), the transfer decision must be economically viable, that is, prots expected from this change must exceed the costs. Reasons4 evoked by the managers generally support their policy and their development strategies. The reasons most often quoted by managers are: improvement of rm visibility; strengthening their rms credibility with customers, suppliers, and partners; increased liquidity for their common stock shares; optimizing potential for appealing to the market to accompany eventual internal and external growth if required; permitting their current and future shareholders to benet from guarantees and protections oered by a regulated market. The companies that decide to change the listing compartment of their common stock from a non or less regulated market to a more regulated one, have to fulll stringent admission conditions. The strict conditions for admission to a regulated stock market can be considered as a surveillance device as to the quality of the candidate rms and their future prospects. Considering this fact, we can imagine that the transfer to a more regulated market is a means that managers can use to indicate their good qualities to the market. Therefore, if investors consider the approval of the transfer by market
The transfer reasons are generally mentioned in the prospectus provided by the applicant-rm during its application process to transfer.
4

authorities as a signal of improvement of the quality of the candidate rms, they should thus react favorably to transfer announcements. For the company in question, compartment transfer also implies adoption of management and communication practices adapted to the constraints of the new compartment. On NYSE-Euronext Paris for example, the transfer towards a more regulated compartment involves changes in terms of constraints of information disclosure (transparency), of guarantees and security of the transactions and in terms of pricing processes for the migrating securities. In fact, information disclosure obligations, guarantees oered, and organization and functioning are very dierent between a regulated market and non (or less) regulated market. These changes are not without impact on the value of the rm. 2.1. Transfer and improvement of rm visibility and information disclosure obligations The transfer from a non (or less) regulated market to a more regulated one improves the visibility and prestige of the migrant rm. It also implies an additional communication eort related to nancial and operational information and publication of any information able to modify their securities value. According to Arbel et al. (1983), the information available on a security has an impact on the level of the return required by investors in this security. In fact, in their theory of the generic or neglected securities, they show that investors ask for a higher return to hold the securities on which they are less informed (neglected securities) than for those about which they have enough information (generic securities). Merton (1987) provides a theoretical model of capital market equilibrium with incomplete information to explain why managers should consider having their rm stocks listed on a visible market as one way to increase their liquidity and value. Indeed, according to Mertons model, investors tend to negotiate only stocks on which they hold information. Considering this hypothesis, his model shows that an increase in the available information about a rm leads to an enhancement of the size of its investors base. This increase in investors base should, in turn, improve the demand of the rm stocks and ultimately reduce the rm investors expected returns. Consequently, this improvement of liquidity and reduction of the cost of capital should lead to an increase in the market value of the rm stocks. Merton also argues that the scale of the eect of shareholder base increase is higher for lesser known 7

stocks and for those stocks with high specic risk. According to Mertons model, any operation allowing widened shareholder base, as for instance operations improving visibility or increasing available information, must be led by managers. Hence, compared with listing their stock on a less regulated market compartment, listing on a high quality market compartment is a superior path to achieving the goals of larger investor base or better investor recognition from the corporate managers point of view. Diamond and Verrecchia (1991), in their theoretical analysis, show that reinforcement of information disclosure requirements increase liquidity by reducing the level of information asymmetry via improvement of the quality and reliability of the information held by investors in particular non-informed investors. Transfer to a more regulated market, via the obligation of disclosing additional information, can also aect the level of risk perceived by investors. In fact, as we saw previously, by listing on a more regulated market a rm is subject to additional information disclosure obligations. Arrival on the market of this additional information can bring relevant elements to investors, allowing them to better estimate rm risk levels. Lambert et al. (2007) demonstrate in theory that disclosing more accounting information leads to a reduction of the cost of the capital via a decrease in rm systematic risk. Thus, we suppose that the announcement of a transfer could engender a renewed investor and analyst interest for the migrant rm. This interest renewal can be translated into close scrutiny of these rms and/or by an increase in the number of analysts who follow them. As a consequence, the rm may experience increased investor condence in their stocks, as a result of improvement in the quality and the reliability of information received by investors. Investors are thus able to better assess future cash-ow and hence reduce estimation risks. By interpreting transfer towards a more regulated market as an operation increasing visibility, as well as the security oered to the investors in terms of quantity and quality of the information available on a stock, we expect a decrease of information asymmetry, an improvement in liquidity, and a reduction of investors expected return. Finally, all these consequences should translate into an increase in stock price. We assume that investors are inclined to pay a higher price today if they anticipate improved future conditions for reselling their assets, or if they feel they can use these assets as guarantees to obtain nancing.

2.2. Transfer and change in trading system Another expected consequence of transfer towards a more regulated market compartment is the change of the trading system (price discovery mechanism). The trading frequency of stocks is higher on regulated markets than on non (or less) regulated market compartments. The more a market oers agents the possibility to frequently observe prices, the lower the degree of information asymmetry for the stocks listed on this market. As our rms move from a compartment where the trading frequency is low (simple call auction system with one auction per day) towards a market where the trading frequency is high (call auction system with two auctions per day or continuous trading system), the non-informed agents have more opportunities to deduce a part (or all) of the private information held by the informed investors5 . So, the compartment transfer, by allowing the reduction of the risk of adverse selection, leads to an improvement of the transaction volume and thus a decline of cost of the capital (expected return). Empirical studies on the consequences of the change in the trading mechanism (see Amihud et al., 1997; Muscarella and Piwowar, 2001; Kalay et al., 2002; Henke and Lauterbach, 2005) show that moving stocks from a single daily call auction to continuous trading increases stock value. These studies also demonstrate that transfer to continuous trading increases stock liquidity and reduces the volatility. From all these arguments developed above, we assume that the transfer towards a more regulated compartment is value-creating for the migrant rms, improves their stock liquidity level and reduces the risk perceived by investors. 3. Description of trading environment and data 3.1. Specicity of the French Stock Market (NYSE-Euronext Paris) NYSE-Euronext Paris (ex -Bourse de Paris) is a subsidiary of NYSEEuronext created in April, 2007. NYSE-Euronext arises from the merger of Euronext6 and NYSE. NYSE-Euronext Paris is an order-driven market.
These explanations are based on the rational expectations equilibrium models (see Grossman, 1976; Hellwig, 1980; Grossman and Stiglitz, 1980; Easley and Ohara, 2004). 6 Euronext resulted from the merger of the stock exchanges in France, the Netherlands, Belgium, and Portugal, in September, 2000.
5

In NYSE-Euronext Paris, there are two trading systems: a call auction system with one or two auctions per day, and a continuous trading system. 3.1.1. Organization and trading mechanism In 2005, NYSE-Euronext Paris made a fundamental change in its trading market compartment. Before this reform, NYSE-Euronext Paris was divided into several markets: three regulated markets/compartments (Premier, Second and Nouveau marchs) and one non-regulated (March Libre e e which replaced the Hors Cote (HC)). Each trading compartment has its own listing requirements. The shares were classied according to their size and trading volume. Since December, 1991, the stocks which have a relatively high trading volume have been traded in a continuous system. Whereas the least traded securities are negotiated in one or two daily call auctions. After 2005, NYSE-Euronext Paris reorganized and created of the three previous markets, a new single market called Euronext (previously named Eurolist before July, 2008), bringing together all the values previously listed on the Paris Stock Exchange regulated markets. In addition to the Euronext, a new structured and organized market, Alternext, was created in 2005 , but was not regulated in the legal sense of the European Directive. Alternext hosts Small and Medium-sized enterprises (SME) to foster their development. In addition to these two new markets, the March Libre (ML) still exists. It e welcomes rms which are too young or too small to be listed on the regulated compartments. The payment/delivery operations on the ML do not benet from the guarantee of the NYSE-Euronext clearing house. NYSE-Euronext Paris is a centralized and order-driven market. The orders are treated by computer. It is also a transparent market where the participants can observe in real time the prices, the transaction volumes, as well as the ten bet purchase and sale oers in the order book. The stocks on NYSE-Euronext Paris are classied into several trading groups, each with diering trading mechanisms. The continuous trading system consists of an electronic limit order book that is open to the public. The trading session begins by a pre-opening phase running from 7:15 am until 9 am (7:30 am to 9:00 am before 2005). During this period, orders are accumulated in the central order book but no transactions occur. The continuous trading session, ocially speaking, opens with an auction at 9 am, proceeds with continuous trading until 5:30 pm, and closes with a call auction at 5:35 pm. During this period, investors can submit market and limit buy and sell orders to the order book, including 10

hidden limit orders. All orders are then prioritized by price and by time. As soon as a priority order nds a counterpart, it is executed at once. After the closing auction, orders can be entered and matched at the closing price and only at that price during a period from 5:35 pm to 5:40 pm (trading-at-last phase). In the call auction system, market participants can submit orders to the auction that are stored in an order book. The orders are collected continuously from 7:15 am (7:30 am before 2005) to 5 pm. But the orders are executed only twice a day for listed securities in the two daily call auction system on the SM (11:30 am and 4 pm), on the NM (9:30 am and 5 pm) and on NYSE-Euronext (11:30 am and 4:30 pm), and once a day for the stocks traded on the ML or the HC (3 pm). Fifteen minutes prior to each auction, the order book is closed and the market-clearing price is determined. The price should maximize turnover, minimize the imbalance between buy and sell orders, and minimize the price change compared to the most recent call auction. All auctions are followed by 30 minutes of post-auction trading (trading-at-last phase), where transactions can be executed at the price determined in the auction. 3.1.2. Information disclosure requirements Listed companies have to respect certain number of obligations as for example the rules of good governance and the obligation to inform investors. This last one depend on the admission conditions of the section in which the companies are listed. In accordance with the new mandatory disclosure stemming from the European Transparency Directive which have been in eect since 2007, the companies whose securities are admitted to trading on a regulated market (Euronext) have to publish periodic and on-going regulated information. These regulated information include nancial reports, information on major holdings of voting rights and information disclosed pursuant to the Market Abuse Directive (2003/6/EC). The companies listed on Alternext have also the obligation to disclose any information likely to have a sensitive inuence on the stock price. However, these obligations are less stringent than those applied on Euronext. For instance, Firms listed on Alternext have only to make public an annual nancial statement, consolidated if necessary, as well as an annual and a half-yearly management report. On the other hand, the issuers of securities traded on ML and their shareholders are not held by the information obligations ensuing from the admis11

sion in the negotiations on a regulated market. 3.1.3. Transfer procedure The transfer procedure is voluntary in NYSE-Euronext Paris. Companies wishing to transfer the trading locations of their stocks from a non (or less) regulated compartment to a more regulated one of the Paris Stock Exchange must, however, satisfy certain conditions and accept the terms and the conditions xed by the target compartment. These conditions dier from one compartment to another and concern criteria like, for instance, the minimum percentage of capital distributed to the public and the number of published annual accounts. Besides these criteria and according to the compartments, companies are subject to more or less stringent information disclosure obligations. They are also obliged to maintain or to improve the liquidity of their securities. To be transferred into a regulated compartment, a rm has to follow a procedure of introduction in several stages. On the NYSE-Euronext Paris, this procedure is very similar to an initial public oering. First of all, according to its objectives and to the choice of the new listing compartment, the company has to hire an Investment Service provider (ISP) or a listing sponsor whose task consists of guiding the company in its transfer procedure. The ISP also has to help the rm prepare its prospectus and its communication for investors and the economic press. Then, the company has to send the AMF and NYSE-Euronext authorities an application le and all the necessary documents (history of nancial reports) to get AMF and NYSEEuronext approval7 . AMF and NYSE-Euronext Paris have a maximum of 30 days to make their decision. In the case of a favorable decision, the rst trading in the new compartment will occur on the date xed by the company and NYSE-Euronext. In tandem the transfer procedure, some rms proceed with a seasoned equity oering. These new shares are directly traded in the new compartment. 3.2. Data Our sample is made up of rms which transferred trading location of their common stocks from a small NYSE-Euronext Paris compartment to a larger one. Transfer operations studied in this paper are exclusively those towards
7

NYSE-Euronext authorities give their agreement about four days after AMF approval.

12

a superior-quality market. The reason for this choice is that on NYSEEuronext Paris, few rms switch from a big compartment to a smaller one (between 1995 and 2007, only two rms made this change). Over our period of study (1995-2007), 79 rms changed the trading compartment of their stocks on the French Stock Market. To be included in the nal sample, rms were required to have no more than 10 missing daily returns or 5 consecutive days with missing returns over the event period. By further eliminating rms which proceeded with another corporate action (stock split, seasoned equity oering, share repurchase, takeover bid, merger...) during the event period, a nal initial sample of 71 rms was retained. Table 1 shows the annual distribution of the nal sample by origin and destination compartments. We notice that more than half of the rms in our sample switched from the ML or HC to the SM. Hence, in an eort to achieve homogeneity and coherence we constituted a second sample made up of only rms that moved from the ML or the HC to a more regulated market (NM, SM, PM, Alternext and Euronext). This sample, called Reduced sample, included 61 rms. Later, this reduced sample served as the main sample to test our various hypotheses on liquidity and risk changes. [insert table 1 about here] Furthermore, we created a control rm sample by matching all our switching rms (71) with at least one comparable rm. This matching operation was based on two criteria: business sector and departure compartment. We proceeded as follows: for each rm in our initial sample, we identied all the rms having the same business activity8 as the rm under consideration that is switching compartment. These comparable rms must also be listed in the same compartment as that being left by the rm under consideration. The constitution of such a sample allows us to examine the eects of the transfer on the prices, the liquidity, and risk while taking into account sector-based and origin compartment eects. In fact, we will compare the characteristics of transferred stocks with those of their comparable stocks; this allows us to measure the consequences of the transfer in a better way than if we contented ourselves only with a comparison with a global market index. Data on switch announcement dates (day of AMF approval of the transfer) were obtained from the AMF and NYSE-Euronext websites. Data on
8

According to ICB classication.

13

stock prices and trading volume were obtained from the EUROFIDAI databases. Daily data on the weighted EUROFIDAI Global Index were used as proxy for the market portfolio. We use this index rather than the CAC40 or SBF250 index because the former has a wider coverage and includes all rms trading on NYSE-Euronext Paris9 . Stock returns are continuously compounded and calculated from adjusted daily closing prices. Stock daily prices are adjusted for the following corporate actions: dividend payment, splits, and seasoned equity oering10 . Trading volume is measured as turnover in Euros. For every stock, we calculated the daily returns as follows: Rit = ln Pit Pit1 (1)

where Rit is the return on stock i on day t, and Pit and Pit1 are respectively the adjusted prices of stock i on days t and t 1. 4. Empirical results 4.1. Stock response to transfer to a more regulated compartment 4.1.1. Short-term analysis To analyze the eect of the transfer on switched stocks return, we rst use the classic event study methodology which consists of verifying the existence of signicant abnormal returns (AR) around the announcement date (here the date of obtaining the AMF visa). This methodology allows not only measuring the price reaction to the transfer announcement, but also to estimate the wealth created by the operation. The event window is from 30 days before the announcement date (A30) until 30 days after this day (A+30). Choosing the day of obtaining the AMF visa as an event date is problematic. In fact, it is likely that some investors learned about transfer projects even before the AMF and NYSE-Euronext approval. However, we chose this date as event date because we think that the project of transfer becomes really eective from this date. Besides, we have no accurate information on the other dates (General Shareholders Assembly
However, the patterns of EUROFIDAI Global Index and CAC40 or SBF250 index are very close. 10 For more details on the calculation of adjusted prices, you can refer to the EUROFIDAI website: https://www.eurofidai.org/Europe_database_description_guide.pdf.
9

14

which decided on the transfer or the ling date of the transfer application). Thus, we start from day A 30 to account for possible leaks of information about transfer project. The maximum day number separating the deposit of the transfer application le and AMF executive committees approval is 30. We estimated the abnormal returns (AR) as follows: ARit = Rit Kit pour t [30; +30] (2)

where ARit indicates the abnormal return of stock i on day t and Kit is the estimation of the expected return of the stock i during the event period in the absence of the announcement. We use two approaches to estimate Kit . In the rst approach, we compute an event study methodology based on Scholes and Williams (1977) market model. Scholes and Williams (1977) beta estimation method is preferred because most of our switched stocks are traded infrequently within the day, generating non-synchronous stock return and market return data. The market index used is the daily return on the value-weighted EUROFIDAI index. The parameters of market model were estimated over an interval of 370 days (from -400 to -31).
Kit = i + i Rmt + it

(3)

with i = i + i + i+ EST EST and i = Ri i Rm 1 + 2m

where Rmt is the daily return on the value-weighted general EUROFIDAI index, i is the ordinary least squares (OLS) slope estimate from the simple linear regression of Rit on Rmt1 , i is the OLS slope estimate from the regression of Rit on Rmt , i+ is the OLS slope estimate from the regression of Rit on Rmt+1 , and m is the estimated rst-order autocorrelation of Rm . EST Ri is the mean return of stock i over the estimation period (from -400 to EST -31) and Rm is the mean market return over the estimation period. The second approach is based on a control sample method. In this approach, we use the adjusted-return method to estimate Kit . Kit = Rit
BEN CH

(4)

15

where Rit is the mean return of control stocks matched to switched stock i on event day t. The main dierence between the two approaches used in this paper lies in the fact that the rst approach uses the market model and the market index to estimate Kit whereas the second does not make any assumption about the returns generating model and uses comparable control stocks. Fig. 1 and table 2 show the results of our event study based on the rst estimation approach of Kit . As shown in Fig. 1, the average cumulative abnormal returns (CAR) rise slightly during the pre-announcement period (-30 to -1), possibly reecting news leaks or market anticipation. The CARs in this period is about 2.62% (2.89% for Reduced sample11 ). They then rise sharply at the announcement and through the day of obtaining of NYSEEuronext approval. The CARs of the period separating the AMF and NYSEEuronext approvals (0 to +4) is 4.06% (4.27% for Reduced sample), the announcement through transfer CAR (0 to +10) is 3.22% (3.31% for Reduced sample), and the post-transfer CAR (+10 to +30) is -4.16% (-4.76% for Reduced sample). These results show that the transfer of stocks into a more regulated compartment generated a price increase before the listing on the new compartment. After that, CARs gradually drift downward from day +10, the inclusion date in the new compartment. We observe that CARs remain positive over the event period. CARs calculated from day +1 to +30 are negative (-1.66% and -1.98% respectively for initial and reduced samples), but not statistically signicant. These ndings dier from those of Lamba and Ari (1997) who notice statistically signicant negative CAR a few days after the admission on the new market. But, they are roughly similar to those reported by Baker and Edelman (1990), who do not nd signicantly negative CAR after the transfer. The downward trend of CARs that we observed after the transfer (inclusion date) on a more regulated market contradict the eciency hypothesis of nancial markets. The possible causes for this decline of CARs are not studied in this paper. McConnell and Sanger (1987) and Dharan and Ikenberry (1995) evoke possible explanations such as the correction of the excessive reaction of the market after the announcement and the timing of the transfer application, this means that the managers choose the convenient
Let us remind that Reduced sample is the sample constituted only of stocks that moved from a non-regulated market to a regulated one of NYSE-Euronext Paris.
11

BEN CH

16

moment (when all the protability indicators are at their highest) to request the transfer of their stocks. [insert gure 1 about here] Table 2 presents average excess returns (AR) and cumulative excess returns (CAR) for the initial (71 rms) and reduced (61 rms) samples. The reduced sample includes only rms which transferred their common stocks from a non-regulated market to a regulated market within the French market. We used the Scholes and Williams market model to calculate the abnormal returns. By analyzing this table, we observe some signicant abnormal returns before the event date for both the Initial and Reduced samples. This report conrms our intuition that the market may know about transfer projects before the AMF approval. These signicant AR appeared around dates -26, -18, -11, -9, -7, and -3. However, we cannot draw an immediate conclusion, because we do not have relevant and specic information on the real announcement dates. Besides, the abnormal return observed on day zero is not signicant for both samples. The day following the event date, the AR (approximately 1.12% for the initial sample and 1.22% for the reduced sample) becomes signicant. For both samples, the ARs remain positive and signicant for three days after the event date. Signicant reactions are also observed after Euronext approval (day +4), but most of these reactions are negative. [insert table 2 about here] We checked the price behavior observed above by using the benchmark control approach methodology (our second approach described above). In this approach, we estimated the abnormal return of each transferred stock on each event day by subtracting from its observed return the mean of its BEN CH ). Fig. 2 shows the evolution of the inicomparable stocks returns (Rit tial samples CARs calculated with the two approaches. The results obtained by the control sample method are almost similar to those obtained by the classic event study methodology. In the pre-transfer period, the CARs are close to zero, then they start to increase sharply until day +4 and from this date, the CARs begin to decline gradually. We also notice that the market reaction estimated via the control sample approach is less strong than when we use a market index as benchmark. But contrary to what we have observed with the rst approach, we notice in the control sample approach that CARs 17

become negative from the twenty-fth day after the announcement. However, these negative CARs are not statistically signicant. [insert table 3 and gure 2 about here] 4.1.2. More long-term analysis The empirical studies on IPO or stock exchange transfer show, for the greater part, that the long-term performances of listed or transferred companies weaken in a signicant way during the years following their admission. Besides, Ritter (1991) and Loughran and Ritter (1995) highlight that the under-performance is more pronounced for young and small-sized companies. As regards the transfer of compartment, we still miss answers on this issue of long and medium-term performance. The object of this sub-section is to check whether the decline of CARs is temporary or persistent in the longerterm. Basing on the results of other types of transfer and on IPO, we should expect negative long-term abnormal returns. On the other hand, according to our analysis of the consequences expected from compartment transfer (see section 2), switched stocks should not under-perform their comparable stayed on the origin market. We make a long-term event study based on the Buy-and-Hold method12 . This method is very used in the literature. The benchmark used to calculate the abnormal returns is EUROFIDAI index. Roll (1983) underlines that this method is a good unbiased estimator of returns over the holding period. Barber and Lyon (1997) nd that this methodology is more adapted to measure the long-term abnormal returns. We calculate the Buy-and-Hold returns on 400 days after the announcement date. The results show that the companies which changed their listing compartment on NYSE Euronext Paris experience a deterioration of their performance in the longer term. Indeed, by observing gure 3, we notice that the returns of switched stocks fall strongly after their admission on the new compartment. This decline seems to accelerate 200 days after the announcement of the transfer. In a general way, this gure shows that the transferred stocks are less successful than the whole market (represented here by the EUROFIDAI index) after their listing on the new compartment. These results conrm those of the studies ending in the decline of the long-term perfor12

For this study, we recalculate the daily returns as follows: Rit =

Pit Pit1 Pit1

18

mance. However, the reasons of this under-performance are not addressed in this article. [insert table 4 and gure 3 about here] 4.2. Transfer impact on liquidity To analyse the transfer eect on liquidity, we used two liquidity measures frequently employed in the literature: transaction volume and Amihud (2002)s relative illiquidity ratio. For a stock i, the relative illiquidity ratio is dened as follows: ILLIQi = 1 Di |Rit | V olit (5)

where |Rit | is the absolute value of stock is return on day t, V olit is stock is volume (in Euros) on day t, and Di is the number of trading days in the period. ILLIQ is essentially the mean over some period of the daily price response associated with one Euro of trading volume in the stock. Thus, it (ILLIQ) may be described as a rough measure of the price impact. It is interpreted in the following way: the lower Amihuds stock illiquidity ratio, the greater the stock liquidity. Table 5 recapitulates liquidity and risk measures, descriptive statistics for Global, Switched, and control stock samples over the pre-transfer period (400 to -31) and the post-transfer period (+31 to +400). The switched sample, also called portfolio S, designates the reduced sample described in previous sections. The global sample includes both switched stocks and their comparable control stocks. In this table, we observe that the average daily trading volume and average number of trading days of switched stocks increase after the transfer. Their illiquidity ratio decreases over the same period. These reports show that stocks which move to a more regulated trading compartment experience an improvement of their liquidity level. However, we must check whether this liquidity increase is statistically signicant. Table 6 compares the average of various liquidity measures before and after compartment transfer announcement. Trading volume, dened as the average daily stock volume, increases from 59.22 103 before the transfer announcement to 203.86103 after the transfer announcement. The average change in daily trading volume is statistically signicant (t-statistic = -4.115). The increase in daily trading volume suggests an improvement in stock liquidity following transfer to a higher quality and regulated section. 19

[insert tables 5, 6 and 7 about here] The comparison of Amihuds illiquidity ratio of our transferred stocks sample before and after transfer announcement shows that the illiquidity decreases dramatically after the transfer to a more regulated compartment (0.8782104 vs. 0.3283104 ). The change in illiquidity ratio is signicant (t-statistic of -2.903). Hence, the liquidity level of transferred stocks improves after the transfer. To further explore this suggestion we examine the liquidity change in the event window. We divide this period into three sub-periods: pre-announcement (-20 to 0), pre-transfer (+1 to +10) and post-transfer (+11 to +20). Then we compute Amihuds illiquidity ratio on these three sub-periods and compare them. Table 8 presents the result of these tests. The ndings show that the liquidity level increases when we compare the pre-transfer and posttransfer periods to the pre-announcement period. However, we did not nd any signicant change between pre-transfer and post-transfer periods. [insert table 8 about here] Based on these ndings, we attempt to analyze the price reaction to transfer announcement as a function of pre-transfer liquidity level. This is a test of Grammatikos and Papaioannou (1986b)s marketability gain hypothesis. This hypothesis stipulates that investors react more positively to the transfer announcement of low liquidity stocks than to that of more liquid stocks. To test this hypothesis, we divide our switched stock sample (reduced sample) into two groups, low-liquidity and high-liquidity groups, based on the median of Amihuds illiquidity ratio. Then we compute an event study for these two groups. Fig. 4 shows that the CARs of the low liquidity stocks widely exceeds those of the stocks classied as highly-liquid. This result supports the liquidity gain hypothesis that the market responds more favorably to announcements of transfer for low- versus high-liquidity stocks before switching. [insert gure 4 about here] We also observed that the CARs of the low-liquidity group remains strictly positive even after the transfer, while those of the high-liquidity group are relatively close to zero. The low-liquidity group result is similar to that found by Baker and Edelman (1990) on the American market. It shows that the transfer creates value for stocks which were relatively less liquid before 20

the transfer announcement. We observe an insignicant market reaction for stocks which were relatively very liquid before the transfer announcement. One explanation of this nding is that the market anticipates the transfer of the highly liquid group. For low liquidity rms, a switch to a more regulated compartment may come as a surprise to the market resulting in a price reaction. [insert table 9 about here] 4.3. Transfer impact on volatility Since our analysis reveals changes in the transferred stocks liquidity, we also analyze the volatility of switched stocks around the transfer date. Like liquidity, an analysis of volatility may provide an indication of the abnormal return results obtained. To analyze the volatility of transferred stocks, we examine the variance around the transfer announcement day. We compare the variance of switched stocks daily returns before and after the event day. The variance of pretransfer period was calculated over the period from 400 days to 31 before the transfer announcement and the post-transfer period one over +31 to +40013 . Table 10 sums up the results of these tests. We observe that 57.37% of stocks exhibit a decrease in their volatility after the transfer. This decrease is statistically signicant at a threshold of 5%. We also check whether the control stocks experience a change in their volatility. We do not observe any signicant changes for the control stocks. Hence, we arrive at a rst conclusion that the transfer to a more regulated section reduces the returns volatility of switched stocks. To further explore this change in volatility after the transfer, we decompose the total variance in its two components: systematic and specic risks. Then we compare these characteristics before and after the transfer. The issue we examine is whether there is any change in rms systematic and specic risks when it switches from a less regulated compartment to a more regulated one. We follow Durnev et al. (2004)s methodology in distinguishing rmspecic variation from the sum of market-related and industry-related variation. They refer to the latter sum as systematic variation. We estimated
We also checked the robustness of our tests by estimating these variances on other periods. The results have not signicantly changed.
13

21

the systematic risk by calculating the betas of the following regression:

i Rit = i + im Rmt + is Rst + it

(6)

i where Rst is the daily return of stock is sector index, i , im , and is are constant coecients, and it is the idiosyncratic risk. From equation 6, we estimate the specic risk by calculating the variance of i . In addition to this specic risks measure, we also compute another one inspired from Durnev et al. (2004)s measure:

Durnev = ln

1 R2 R2

(7)

where R2 is the coecient of determination of the regression (6). Table 10 presents the results of these comparisons. The ndings do not show any signicant change in betas coecients. Therefore, the transfer seems not to aect the stocks systematic risk. These results bring to light that the decline of the volatility observed for the transferred stocks cannot be explained by a change of the systematic risk. [insert table 10 about here] Besides, the results of the specic risks comparison tests show that 59% of the transferred stocks have a residual variance which falls after the transfer. This gure rises to 67% if we consider Durnev et al. (2004)s measure. These changes are signicant at the 1% level. By checking the change in systematic and specic risks for the control sample, we did not observe any signicant proof of change. In sum, these results show that the operation of transfer towards a more regulated market, via an increase of available information on the stock, reduces rm specic risk. 5. Summary and conclusions In this paper, we analyze the behaviour of stock prices around a stock market compartment transfer. We examine a sample of 71 rms which transferred their common stocks from a non (or less) regulated compartment to a more regulated one of the French Stock Market between 1995 and 2007. We nd signicant positive abnormal returns around the day of transfer 22

announcement (AMF approval day of transfer project). However, after the switch day (about 10 to 12 days after announcement), these rms have significant negative abnormal returns. For rms with low liquidity level before the transfer, the post-transfer CARs remain positive. Further, we also observe that the market reacts more favorably to the announcements of low-liquidity rm transfers to a more regulated compartment, than to transfer of rms with higher liquidity level during the pre-transfer period. Our examination of the impact of market compartment transfer on liquidity reveals a signicant increase in trading volume and a decrease in Amihuds illiquidity measure. These results show that a stock exchange compartment transfer is accompanied by signicant liquidity gains. In spite of our various arguments in favor of a decline of the level of systematic risk after the transfer, we do not nd any signicant proof of change in this risk. However, we notice that globally the transferred stocks exhibit a decrease in the volatility of their returns after the transfer. This decline of the variance seems to result from a reduction of their specic risk. Our analysis has implications for managers who are faced with or are considering a decision to change the trading compartment of their stocks. We nd evidence indicating that although the market appears to value a move to a more regulated market segment, the market reaction is not uniform. Firms with relatively low liquidity before the transfer announcement have the most to gain in terms of a positive price movement and improvement in liquidity. Moreover, price increases observed after the transfer announcement are not permanent for all stocks. Thus managers need to give careful consideration to the possible eects on the pricing and liquidity behavior of rms being switched from a less regulated exchange section to a more regulated one. In this paper, we bring an original method to analyze the eects of a stock exchange compartment transfer: enterprise-control approach. However, we do not further explore the negative CARs observed after the transfer. Some potential explanations for this pattern are evoked in the literature14 : market overreaction correction, prot-taking, timing of transfer application, and decrease in operating income after the transfer, to name a few. In addition to this future research perspective, it might be interesting to analyze the determinants of stock exchange section switching in NYSEEuronext where transfer decision is made by managers. The knowledge of
14

See Dharan and Ikenberry (1995), for more details.

23

the motivations urging managers to transfer their stocks could help us in the global understanding of the eects of compartment transfer. Otherwise, since October 2009, the law no 2009-1255 of October 19th, 2009 plans the possibility for a listed company on a regulated market of NYSE-Euronext Paris to transfer the trading location of its stocks on a less regulated market. Since this law, about 35 rms have moved their stocks listing location from Euronext to Alternext. Future research should also interest in the motivations and consequences of this new trend of transfer. References Amihud, Y., 2002. Illiquidity and stock returns: cross-section and time-series eects. Journal of Financial Markets 5 (1), 3156. Amihud, Y., Mendelson, H., Lauterbach, B., 1997. Market microstructure and securities values: Evidence from the tel aviv stock exchange. Journal of Financial Economics 45 (3), 365390. Arbel, A., Carvell, S., Strebel, P., 1983. Giraes, institutions and neglected rms. Financial Analysts Journal 39 (3), 5763. Bacmann, J., Dubois, M., Ertur, C., 2002. Valuation eects of listing on a more prominent segment of the stock market: evidence from france. European Financial Management 8 (4), 479493. Baker, H. K., Edelman, R. B., 1990. OTC market switching and stock returns: some empirical evidence. Journal of Financial Research 13 (4), 325. Baker, H. K., Edelman, R. B., 1992a. AMEX-to-NYSE transfers, market microstructure, and shareholder wealth. Financial Management 21 (4), 60 72. Baker, H. K., Edelman, R. B., 1992b. The eects on spread and volume of switching to the NASDAQ national market system. Financial Analysts Journal 48 (1), 8388. Barber, B. M., Lyon, J. D., 1997. Detecting long-run abnormal stock returns: The empirical power and specication of test statistics. Journal of nancial economics 43 (3), 341372.

24

Boehmer, E., Masumeci, J., Poulsen, A. B., 1991. Event-study methodology under conditions of event-induced variance. Journal of Financial Economics 30 (2), 253272. Clyde, P., Schultz, P., Zaman, M., 1997. Trading costs and exchange delisting: The case of rms that voluntarily move from the american stock exchange to the nasdaq. The Journal of Finance 52 (5), 21032112. Dhaliwal, D., 1983. Exchange-listing eects on a rms cost of equity capital. Journal of Business Research 11 (2), 139151. Dharan, B. G., Ikenberry, D. L., 1995. The long-run negative drift of postlisting stock returns. Journal of Finance 50 (5), 15471574. Diamond, D. W., Verrecchia, R. E., 1991. Disclosure, liquidity, and the cost of capital. Journal of Finance 46 (4), 13251359. Durnev, A., Morck, R., Yeung, B., 2004. Value-enhancing capital budgeting and rm-specic stock return variation. The Journal of Finance 59 (1), 65105. Easley, D., Ohara, M., 2004. Information and the cost of capital. The journal of nance 59 (4), 15531583. Edelman, R. B., Baker, H. K., 1990. Liquidity and stock exchange listing. Financial Review 25 (2), 231249. Grammatikos, T., Papaioannou, G., 1986a. The informational value of listing on the new york stock exchange. Financial Review 21 (4), 485500. Grammatikos, T., Papaioannou, G., 1986b. Market reaction to nyse listings: Tests of the marketability gains hypothesis. Journal of Financial Research 9 (3), 215228. Grossman, S., 1976. On the eciency of competitive stock markets where trades have diverse information. Journal of Finance 31 (2), 573585. Grossman, S. J., Stiglitz, J. E., 1980. On the impossibility of informationally ecient markets. The American Economic Review 70 (3), 393408. Hall, P., 1992. On the removal of skewness by transformation. Journal of the Royal Statistical Society. Series B (Methodological) 54 (1), 221228. 25

Hellwig, M. F., 1980. On the aggregation of information in competitive markets. Journal of economic theory 22 (3), 477498. Henke, H., Lauterbach, B., 2005. Firm-initiated and exchange-initiated transfers to continuous trading: Evidence from the warsaw stock exchange. Journal of Financial Markets 8 (3), 309323. Horne, J. C. V., 1970. New listings and their price behavior. Journal of Finance 25 (4), 783794. Kadlec, G. B., McConnell, J. J., 1994. The eect of market segmentation and illiquidity on asset prices: Evidence from exchange listings. Journal of Finance 49 (2), 611636. Kalay, A., Wei, L., Wohl, A., 2002. Continuous trading or call auctions: Revealed preferences of investors at the tel aviv stock exchange. Journal of Finance 57 (1), 523542. Lamba, A. S., Ari, M., 1997. The information content of rms switching from section 2 to section 1 of the tokyo stock exchange. Pacic-Basin Finance Journal 5 (4), 441463. Lambert, R., Leuz, C., Verrecchia, R., 2007. Accounting information, disclosure, and the cost of capital. Journal of Accounting Research 45 (2), 385420. Loughran, T., Ritter, J. R., 1995. The new issues puzzle. Journal of nance 50 (1), 2351. McConnell, J. J., Sanger, G. C., 1987. The puzzle in post-listing common stock returns. Journal of Finance 42 (1), 119140. Merton, R. C., 1987. A simple model of capital market equilibrium with incomplete information. Journal of Finance 42 (3), 483510. Muscarella, C. J., Piwowar, M. S., 2001. Market microstructure and securities values: Evidence from the paris bourse. Journal of Financial Markets 4 (3), 209229. Reints, W. W., Vandenberg, P. A., 1975. The impact of changes in trading location on a securitys systematic risk. Journal of Financial and Quantitative Analysis 10 (05), 881890. 26

Ritter, J. R., 1991. The long-run performance of initial public oerings. Journal of nance 46 (1), 327. Roll, R., 1983. On computing mean returns and the small rm premium. Journal of Financial Economics 12 (3), 371386. Sanger, G. C., McConnell, J. J., 1986. Stock exchange listings, rm value, and security market eciency: The impact of NASDAQ. Journal of Financial and Quantitative Analysis 21 (01), 125. Scholes, M., Williams, J., 1977. Estimating betas from nonsynchronous data. Journal of Financial Economics 5 (3), 309327. Tse, Y., Devos, E., 2004. Trading costs, investor recognition and market response: An analysis of rms that move from the amex (Nasdaq) to nasdaq (Amex). Journal of Banking & Finance 28 (1), 6383. Ule, G. M., 1937. Price movements of newly listed common stocks. Journal of Business of the University of Chicago 10 (4), 346369. Warner, J. B., Brown, S. J., Rochester, N. Y., 1985. Using daily stock returns: The case of event studies. Journal of Financial Economics 14, 331. Ying, L. K., Lewellen, W. G., Schlarbaum, G. G., Lease, R. C., 1977. Stock exchange listings and securities returns. Journal of Financial and Quantitative Analysis 12 (03), 415432.

27

Figure 1: CAR evolution for Initial and Reduced samples

This gure represents the CARs of Initial and Reduced samples. The ARs used to calculate these CARs are estimated by using the market model based on Scholes-Williams beta estimation method.

Figure 2: CAR of Initial sample by AR estimation methods

This gure represents the CARs of the initial sample calculated with dierent methods. Control sample approach indicates the CAR obtained by using the control stocks returns as benchmark to estimate the AR. In market model approach, we computed AR by using the market model based on Scholes-Williams beta estimation method.

28

Figure 3: Long-term CAR evolution for Initial and Reduced samples

Figure 4: CAR evolution for liquidity groups

29

Table 1: Number of compartment switching in NYSE-Euronext Paris between 1995 and 2007

1995 3 0 0 0 4 0 1 1 0 0 3 1 0 0 2 0 6 0 6 0 2 0 1 0 5 0 2 1 4 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 2 0 0 0 0 0 0 1 0 0 0 0 1 4 0

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

30
7 3 7 6 3 4 8

Premier March (PM) e - from SM - from NM - from HC or ML Second March (SM) e - from NM - from HC or ML Nouveau March (NM) e - from HC or ML Euronext (ex. Eurolist) - from Alternext - from ML Alternext - from ML TOTAL 2 6 5

0 2 6 8

1 2 4 7

0 2 7 9

This table presents the annual distribution of the initial sample by origin and destination compartments. Before 2005, NYSE-Euronext Paris was divided in several markets: three regulated markets/compartments (Premier march (PM), Second e march (SM) and Nouveau march (NM)) and one non-regulated (March Libre (ML) which replaced the Hors Cote (HC) e e e compartment). Since 2005, it has been segmented in three listing compartments: Euronext (called Eurolist before 2008), Alternext and March Libre. e

Table 2: Initial and Reduced samples AAR tests of signicance Relative date to AMF visa obtaining -30 -29 -28 -27 -26 -25 -24 -23 -22 -21 -20 -19 -18 -17 -16 -15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 Initial Sample Average Abnormal Returns 0.0048 -0.0022 0.0036 0.0022 0.0043 -0.0029 -0.0017 0.0004 0.0004 0.0021 0.0065 -0.0042 0.0109 0.0009 -0.0041 -0.0012 -0.0040 0.0027 0.0004 -0.0064 0.0030 -0.0046 0.0038 0.0048 0.0025 0.0017 -0.0001 0.0066 0.0003 -0.0027 0.0005 0.0112 0.0093 0.0084 0.0112 -0.0068 0.0035 -0.0066 0.0036 0.0013 -0.0034 -0.0050 0.0004 -0.0060 0.0018 -0.0023 -0.0045 0.0001 0.0012 0.0002 Z-stat Reduced Sample (ML SM) Average Abnormal Returns 0.0030 -0.0029 0.0043 0.0019 0.0049 -0.0038 -0.0001 0.0002 -0.0003 0.0036 0.0074 -0.0035 0.0132 0.0011 -0.0037 -0.0007 -0.0021 0.0055 -0.0015 -0.0069 0.0044 -0.0061 0.0017 0.0062 0.0028 0.0010 0.0006 0.0077 -0.0027 -0.0040 -0.0023 0.0122 0.0121 0.0092 0.0115 -0.0080 0.0070 -0.0087 0.0037 0.0036 -0.0072 -0.0066 0.0012 -0.0053 0.0017 -0.0015 -0.0036 -0.0009 0.0020 -0.0018 Z-stat 0.344 -0.455 0.673 0.659 1.556 -0.495 0.393 0.957 0.206 0.903 0.717 -0.886 2.875 0.434 -0.640 0.235 0.106 1.376 -0.392 -1.788 0.630 -2.009 0.736 1.491 -0.003 0.130 -0.699 1.866 -0.648 -0.279 -0.553 3.184 1.074 2.439 1.212 -1.245 1.397 -1.218 0.799 1.091 -1.306 -1.928 0.607 -0.939 0.585 -0.576 -0.255 -0.061 0.627 -0.266

0.902 -0.420 0.591 0.815 1.572 * -0.393 0.104 0.960 0.241 0.662 0.733 -1.181 2.590 *** 0.243 -0.889 -0.014 -0.425 0.764 0.126 -1.735 ** 0.503 -1.665 ** 1.186 1.289 * 0.042 0.251 -0.887 1.823 ** 0.138 -0.097 0.116 3.424 *** 1.017 2.223 ** 1.600 * -1.270 0.703 -1.271 0.939 0.356 -0.418 -1.773 ** 0.434 -1.306 * 0.554 -0.868 -0.719 0.244 0.556 0.391 Continued on next page

***

* ** ** *

**

*** ***

* **

31

Table 2 continued from previous page Relative date to AMF visa obtaining +20 +21 +22 +23 +24 +25 +26 +27 +28 +29 +30 CAR [-30 to -1] CAR [- 10 to -1] CAR [-5 to 0] CAR [-1 to 0] CAR [-1 to +1] CAR [0 to +1] CAR [+1 to +5] CAR [+1 to +10] CAR [+1 to +30] CAR [-5 to +5] CAR [-10 to +10] CAR [-30 to +30] Initial sample Average Abnormal Returns -0.0013 -0.0049 -0.0011 -0.0021 -0.0035 -0.0043 -0.0001 0.0027 -0.0047 -0.0059 -0.0023 0.0262 0.0142 0.0059 -0.0021 0.0065 0.0096 0.0307 0.0248 -0.0166 0.0324 0.0390 0.0101 Z-stat -0.734 -1.608 0.102 -0.851 -1.176 -0.935 -0.065 0.468 -1.774 -1.687 -0.245 1.500 1.418 0.702 -0.178 1.089 1.840 2.699 1.273 -0.648 2.297 2.064 0.540 Reduced sample (ML SM) Average Abnormal Returns * -0.0005 -0.0037 -0.0033 -0.0032 -0.0052 -0.0065 0.0001 0.0048 -0.0038 -0.0079 -0.0034 0.0289 0.0103 0.0004 -0.0060 0.0031 0.0072 0.0345 0.0268 -0.0198 0.0291 0.0344 0.0070 Z-stat -0.365 -0.951 -0.413 -1.289 -1.576 -1.292 0.037 0.874 -1.048 -2.068 -0.352 1.623 0.997 0.184 -0.735 0.543 1.307 2.429 1.211 -0.583 1.728 1.679 0.587

* * *

** ** * *

** *

** ***

* ***

** **

** **

This table summarizes the results of daily average abnormal returns and cumulative abnormal returns signicance tests for the initial (71 rms) and reduced (61 rms) samples. Reduced sample includes only rms which transferred their common stocks from non-regulated compartment to the a regulated market of French market. We used the market model with Scholes and Williams beta estimation method to calculate the abnormal returns. The event date is the announcement day of AMF visa obtaining. The sample period starts in 1995 and ends in 2007. Data on stocks returns are extracted from EUROFIDAI database. The Z-Stats reect two-tailed standardized cross-sectional test (test developed in Boehmer et al., 1991). * indicates signicance at the 10% level, ** at the 5%, *** at the 1%.

32

Table 3: Initial Reduced samples AAR tests of signicance using control sample as benchmark Relative date to AMF visa obtaining -30 -29 -28 -27 -26 -25 -24 -23 -22 -21 -20 -19 -18 -17 -16 -15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Average Abnormal Returns T-stat -0.61282 -0.52797 1.36694 -1.09010 0.73743 -0.93714 -0.60525 1.19739 1.28509 -0.62295 0.87393 -0.11654 0.81674 0.20571 -0.77417 -0.99971 -1.14912 1.04903 -1.11108 0.73111 -1.15503 -0.10821 0.12214 1.76773 0.07451 -0.57810 -0.34266 0.72407 0.04557 -0.15931 -0.70011 1.78398 2.23742 1.72366 2.41886 -0.00885 -1.53640 -0.11966 -0.69022 0.35180 -0.00679 -1.28021 -1.02818 -0.25984 0.37806 0.29843 -1.77138 0.62911 0.73588 0.46405

-0.00300 -0.00258 0.00669 -0.00533 0.00361 -0.00458 -0.00296 0.00586 0.00629 -0.00305 0.00428 -0.00057 0.00400 0.00101 -0.00379 -0.00489 -0.00562 0.00513 -0.00544 0.00358 -0.00565 -0.00053 0.00060 0.00865 0.00036 -0.00283 -0.00168 0.00354 0.00022 -0.00078 -0.00342 0.00873 0.01095 0.00843 0.01183 -0.00004 -0.00752 -0.00059 -0.00338 0.00172 -0.00003 -0.00626 -0.00503 -0.00127 0.00185 0.00146 -0.00867 0.00308 0.00360 0.00227 Continued on next page

**

** ** ** *** *

**

33

Table 3 continued from previous page Relative date to AMF visa obtaining 20 21 22 23 24 25 26 27 28 29 30 CAR [- 30 to + 30] CAR [- 5 to + 5] CAR [- 30 to 0] CAR [- 10 to 0] CAR [- 5 to 0] CAR [+ 1 to + 4] CAR [+ 1 to + 5] CAR [+ 1 to +10] CAR [+ 1 to + 30] CAR [+ 10 to +30] Average Abnormal Returns -0.00194 -0.00260 -0.00037 -0.00234 -0.00989 -0.00591 0.00392 -0.00344 -0.00794 -0.00172 0.00333 -0.05791 0.02171 0.00383 0.00403 -0.00100 0.03076 0.02271 0.00674 -0.06174 -0.07375 T-stat -0.39563 -0.53084 -0.07464 -0.47736 -2.02081 -1.20771 0.80179 -0.70409 -1.62239 -0.35238 0.68126 -0.28091 1.91882 -0.12577 -0.12656 -0.87847 3.83684 2.23416 1.52898 -0.25762 -1.99916

**

**

*** ** * **

This table summarizes the results of daily average abnormal returns and cumulative abnormal returns signicance tests for the initial sample (71 rms). We used the average of control rms daily returns to calculate the abnormal returns. The event date is the announcement day of AMF visa obtaining. The sample period starts in 1995 and ends in 2007. Data on stocks returns are extracted from EUROFIDAI database. The T-Stats reect two-tailed cross-sectional test (Warner et al., 1985). * indicates signicance at the 10% level, ** at the 5%, *** at the 1%.

34

Table 4: Long-term Buy-and-Hold abnormal returns signicance test

Compounded AAR Panel A. Initial sample CAR [+1 to +30] -0.0097 CAR [+30 to +68] -0.0303 CAR [+69 to +127] -0.0538 CAR [+128 to +250] -0.0241 CAR [+251 to +400] -0.1944 CAR [0 to +250] -0.1116 CAR [0 to +400] -0.3643 Panel B. Reduced sample CAR [+1 to +30] -0.0103 CAR [+30 to +68] -0.0502 CAR [+69 to +127] -0.0456 CAR [+128 to +250] -0.0159 CAR [+251 to +400] -0.2023 CAR [0 to +250] -0.1132 CAR [0 to +400] -0.4130

Median

Z-test

Generalized sign test -0.125 -1.917 -2.429 -2.173 -4.478 -2.685 -3.966 0.111 -2.410 -2.130 -1.850 -4.370 -2.130 -3.810

t1

-0.0006 -0.0278 -0.0766 -0.1230 -0.1783 -0.174 -0.2966 0.0025 -0.0415 -0.0616 -0.1316 -0.2184 -0.2374 -0.3525

-0.595 -1.448 -1.646 -0.350 -2.802 -1.395 -3.700 -0.552 -2.291 -1.232 -0.196 -2.712 -1.204 -3.465

* ** *** * ***

* *** ** *** *** ***

-0.591 -1.426 -1.579 -0.337 -4.715 -1.265 -6.504 -0.548 -2.305 -1.193 -0.192 -4.527 -1.102 -5.939

* * *** * ***

**

*** ***

*** ** ** *** ** ***

**

*** ***

This table recapitulates the results of the long-term event study. It presents the average compounded abnormal returns, median and three signicance tests (Standardized cross-sectional test (Boehmer et al., 1991), Generalized sign test, and Skewness-adjusted transformed normal test (Hall, 1992)). Average compounded abnormal returns were obtained by the Buy-and-Hold event study methodology. * indicates signicance at the 10% level, ** at the 5%, *** at the 1%.

35

Table 5: Liquidity and risk measures descriptive statistics for Global, Switched and control samples before and after the transfer announcement

Variables N

Pre-transfer period Mean Std. dev. 156.69 79 4.8718 3.67% 3.78% 1.567 0.587 0.439 77.47 77 2.0218 3.18% 3.29% 1.518 0.739 0.613 183.49 75 5.7125 3.82% 3.94% 1.570 0.518 0.358

Post-transfer period N 184 184 155 184 184 184 184 184 61 61 60 61 61 61 61 61 123 123 95 123 123 123 123 123 Mean 97.34 222 1.2949 3.18% 2.27% 4.374 0.130 0.145 203.86 276 0.3283 3.71% 3.02% 4.049 -0.051 0.252 45.37 196 1.9054 2.99% 2.00% 4.490 0.195 0.106 Std. dev. 529.35 90 6.0545 5.39% 5,53% 1.519 0.641 0.497 886.07 74 0.9465 5.41% 5,46% 1.425 0.625 0.528 173.26 85 7.6498 5.38% 5,55% 1.538 0.636 0.480

Panel A. Global sample (Global portfolio) Daily trading volume (in K euros) 184 50.41 Average trading days number 184 207 Illiquidity ratio (Amihud) 104 146 1.9617 R2 (%) 184 2.50% Adjusted R2 (%) 184 1.59% Durnev 184 4.610 Market index 184 0.134 Sectorial index 184 0.074 Panel B. Switched stocks sample (S Daily trading volume (in K euros) 61 Average trading days number 61 Illiquidity ratio (Amihud) 104 48 R2 (%) 61 Adjusted R2 (%) 61 Durnev 61 Market index 61 Sectorial index 61 portfolio) 59.22 240 0.8782 1.84% 1.02% 4.952 0.019 0.119

Panel C. Matched sample (B portfolio) Daily trading volume (in K euros) 123 46.11 Average trading days number 123 191 Illiquidity ratio (Amihud) 104 98 2.4924 R2 (%) 123 2.74% Adjusted R2 (%) 123 1.79% Durnev 123 4.487 Market index 123 0.175 Sectorial index 123 0.058

This table presents some descriptive statistics of liquidity and risk variables for Global, Switched stocks and control stocks samples. Switched stocks sample (S Portfolio) represents the Reduced sample (61 rms) and portfolio B the control sample. The Global sample includes Switched and control stocks. the pre-transfer period goes from -400 to -31 and the post-transfer from +31 to +400.

36

Table 6: Post-transfer liquidity vs. Pre-transfer liquidity comparison tests for Global, S, and B portfolios Paired Dierences Mean Std. deviation Z Wilcoxon Asymptotic signicance 0.097 0.008 0.009 0.000 0.000 0.004 0.131 0.500 0.212 * *** *** *** *** ***

Panel A. Global sample (Global portfolio) Daily trading volume (in K euros) 46.93 Average trading days number 15 Illiquidity ratio (Amihud) 104 -0.1335

519.88 87 4.8288

-1.658b -2.660b -2.595a -4.115b -3.688b -2.903a -1.509a -0.674b -1.247a

Panel B. Switched stocks sample (S portfolio) Daily trading volume (in K euros) 144.65 834.69 Average trading days number 36 89 Illiquidity ratio (Amihud) 104 -0.5271 2.1327 Panel C. Matched sample (B portfolio) Daily trading volume (in K euros) -0.74 Average trading days number 5 Illiquidity ratio (Amihud) 104 0.1027 237.77 85 5.8846

* indicates signicance at the 10% level, ** at the 5%, *** at the 1%. a. Based on negative ranks. b. Based on positive ranks. This table sums up the results of dierent comparison tests of the following liquidity variables (Average trading days number, Daily trading volume and Amihuds Illiquidity ratio) before and after transfer announcement day for each sample. The statistic test we used is the non-parametric Wilcoxon one. Switched stocks sample (S Portfolio) represents the Reduced sample (61 rms) and portfolio B the control sample. The Global sample includes Switched and control stocks.

37

Table 7: Portfolios S and B liquidity level comparison tests U of Mann-Whitney Pre-transfer announcement period Daily trading volume 2651.0 Average trading days number 2246.5 Illiquidity ratio (Amihud) 1775.0 Post-transfer announcement period Daily trading volume 1376.0 Average trading days number 1439.0 Illiquidity ratio (Amihud) 1654.0 W of Wilcoxon 10277.0 9872.5 2951.0 9002.0 9065.0 3484.0 Asymptotic signicance 0.002 0.000 0.016 0.000 0.000 0.000 *** *** ** *** *** ***

-3.089 -4.291 -2.404 -6.879 -6.695 -4.394

This table presents the results of liquidity comparison tests between the switched stocks portfolio (S) and the control stocks one (B) before and after the transfer announcement. The statistic tests we used are the non-parametric Mann-Whitney and Wilcoxon ones. * indicates signicance at the 10% level, ** at the 5%, *** at the 1%.

38

Table 8: Short term comparison of transferred stocks liquidity level

Liquidity level dierence LIQ[+1;+30] vs. LIQ[30;1] LIQ[+1;+10] vs. LIQ[10;1] LIQ[+11;+30] vs. LIQ[20;1] LIQ[+11;+30] vs. LIQ[+1;+10]

Panel A. Reduced sample (Non-regulated market Regulated market) Number (%) negative signs 12 (19.7%) 17 (27.9%) 9 (14.8%) 35 (57.4%) Number (%) positive signs 49 (80.3%) 44 (72.1%) 52 (85.2%) 26 (42.6%) Z-STAT 2.84*** 1.96** 3.27*** -0.65 Panel B. High liquidity group Number (%) negative signs 9 (30.0%) Number (%) positive signs 21 (70.0%) Z-STAT 1.26 Panel C. Low liquidity group Number (%) negative signs 3 (9.7%) Number (%) positive signs 28 (90.3%) Z-STAT 2.71*** 6 (20.0%) 24 (80.0%) 1.90** 8 (25.8%) 23 (74.2%) 1.51* 3 (10.0%) 17 (90.0%) 2.53*** 6 (19.4%) 25 (80.6%) 2.11*** 21 (70.0%) 9 (30.0%) -1.26 14 (45.2%) 17 (54.8%) 0.30

This table shows the results of the sign tests for changes in Amihud Liquidity Ratios for Reduced sample and High and Low Liquidity sub-samples. Second column represents the tests for liquidity changes Post and Pre-announcement periods. The columns 3, 4, and 5 represent respectively liquidity changes for Pre-transfer vs. Pre-announcement, Posttransfer vs. Pre-announcement, and Post vs. Pre-transfer. * indicates signicance at the 10% level, ** at the 5%, *** at the 1%.

39

Table 9: High and Low liquidity samples AAR tests of signicance Relative date to AMF visa obtaining -30 -29 -28 -27 -26 -25 -24 -23 -22 -21 -20 -19 -18 -17 -16 -15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 High liquidity sample Average Abnormal Returns -0.0085 -0.0038 0.0066 0.0062 0.0054 -0.0002 -0.0062 -0.0023 -0.0055 0.0038 0.0025 -0.0071 0.009 0.0014 -0.0096 -0.0046 -0.0105 0.0022 0.0116 0.0006 0.0002 -0.0016 0.0049 0.0003 0.0066 0.0014 -0.0057 0.0063 0.0048 -0.0016 0.0024 0.0106 0.0137 -0.0004 0.0050 -0.0074 -0.0014 -0.0045 0.0063 -0.0054 -0.0015 -0.0117 0.0046 -0.0058 -0.0045 0.0042 -0.0055 0.0009 0.0026 0.0005 Z-stat Low liquidity sample Average Abnormal Returns -0.0032 -0.0004 0.0001 -0.0028 0.0029 -0.0058 0.0035 0.0033 0.0072 0.0002 0.0112 -0.0009 0.0130 0.0004 0.0018 0.0029 0.0037 0.0033 -0.0120 -0.0145 0.0064 -0.0080 0.0026 0.0101 -0.0022 0.0020 0.0063 0.0070 -0.0046 -0.0038 -0.0019 0.0120 0.0044 0.0179 0.0188 -0.0062 0.0092 -0.0091 -0.0001 0.0090 -0.0058 0.0027 -0.0049 -0.0062 0.0091 -0.0104 -0.0034 -0.0008 -0.0003 -0.0002 Z-stat -0.609 -0.119 -0.168 -0.567 0.632 -1.199 0.658 1.462 0.764 0.525 1.207 -0.002 2.244 -0.278 0.119 0.773 1.281 0.718 -2.813 -2.444 0.946 -1.925 0.568 1.384 -0.936 0.565 0.102 1.138 -0.972 -0.031 -0.188 3.375 0.179 2.754 1.843 -0.403 1.562 -1.085 0.287 1.635 -0.670 -0.722 -1.254 -0.675 0.851 -1.907 0.003 -0.250 -0.123 0.060

-1.186 -0.590 1.056 1.484 * 1.540 * 0.578 -1.036 -0.475 -0.417 0.419 -0.075 -1.573 * 1.498 * 0.524 -1.127 -0.429 -1.343 * 0.330 2.234 ** 0.026 -0.545 -0.305 1.221 0.308 1.266 -0.302 -1.870 ** 1.503 * 1.289 * -0.126 0.279 1.834 ** 1.370 * 0.272 0.186 -1.878 ** -0.482 -0.690 1.052 -1.008 0.018 -1.823 ** 1.501 * -1.626 * -0.217 0.800 -1.311 * 0.709 0.796 0.454 Continued on next page

**

*** *** ** *

*** *** ** *

**

40

Table 9 continued from previous page Relative date to AMF visa obtaining +20 +21 +22 +23 +24 +25 +26 +27 +28 +29 +30 CAR [-30 to -1] CAR [- 10 to -1] CAR [-5 to 0] CAR [-1 to 0] CAR [-1 to +1] CAR [0 to +1] CAR [+1 to +5] CAR [+1 to +10] CAR [+1 to +30] CAR [-5 to +5] CAR [-10 to +10] CAR [-30 to +30] High liquidity sample Average Abnormal Returns -0.0032 -0.0086 0.0052 0.0023 0.0005 -0.0005 -0.0025 -0.0025 -0.0050 -0.0026 0.0038 0.0260 0.0146 0.0072 0.0008 0.0092 0.0112 0.0196 0.0115 -0.0155 0.0249 0.0284 0.0127 Z-stat -1.255 -2.771 1.152 0.516 0.069 -0.149 -1.049 -0.865 -1.543 -0.337 1.243 0.990 0.828 0.344 0.149 0.989 1.349 1.192 0.279 -0.538 1.020 0.692 0.334 Low liquidity sample Average Abnormal Returns *** 0.0006 -0.0010 -0.0081 -0.0072 -0.0081 -0.0088 0.0025 0.0086 -0.0044 -0.0097 -0.0090 0.0266 0.0137 0.0045 -0.0054 0.0035 0.0078 0.0437 0.0400 -0.0178 0.0404 0.0507 0.0072 Z-stat 0.477 0.150 -1.593 -1.786 -1.768 -1.043 0.523 1.353 -0.917 -2.107 -0.915 1.181 1.190 0.681 -0.390 0.540 1.253 2.656 1.407 -0.367 2.155 2.217 0.452

* ** **

* **

*** * ** **

This table sums up the results for daily average abnormal returns and cumulative abnormal returns for the high liquidity rms (30) and low ones (31 rms) samples. We divided the reduced sample in two sub-samples (High and Low liquidity) according to Amihuds illiquidity ratio.We used the market model with Scholes and Williams beta estimation method to calculate the abnormal returns. The event date is the announcement day of AMF visa obtaining. The sample period starts in 1995 and ends in 2007. Data on stocks returns are extracted from EUROFIDAI database. The Z-Stats reect two-tailed standardized cross-sectional test (test developed in Boehmer et al., 1991). * indicates signicance at the 10% level, ** at the 5%, *** at the 1%.

41

Table 10: Risk level comparison Variance dierence before and after the transfer Total variance Durnev 184 83 (45.10%) 101 (54.89%) -1.95a * 184 93 (50.54%) 91 (49.45%) -0.15b Specic variance Market index Sectorial index 184 102 (55.43%) 82 (44.56%) -1.52b

Variables

Panel A. Global sample (Global portfolio) N 184 184 Number (%) negative signs 96 (52.17%) 93 (50.54%) Number (%) positive signs 88 (47.82%) 91 (49.45%) Z-STAT -1.44b -0.94a

42
123 (55.28%) (44.71%) -1.29b 123 63 (51.21%) 60 (48.78%) -0.02b

Panel B. Switched stocks sample (S portfolio) N 61 61 Number (%) negative signs 26 (42.62%) 25 (40.98%) Number (%) positive signs 35 (57.37%) 36 (59.01%) Z-STAT -2.55a ** -2.75a *** 61 20 (32.78%) 41 (67.21%) -4.30a ***

61 32 (52.45%) 29 (47.54%) -0.13b 123 61 (49.59%) 62 (50.40%) -0.09b

61 34 (55.73%) 27 (44.26%) -1.29b 123 68 (55.28%) 55 (44.71%) -1.22b

Panel C. Matched sample (B portfolio) N 123 Number (%) negative signs 70 (56.91%) 68 Number (%) positive signs 53 (43.08%) 55 Z-STAT -1.51b

* indicates signicance at the 10% level, ** at the 5%, *** at the 1%. a. Based on negative ranks. b. Based on positive ranks.

This table shows the results of the sign tests for changes in dierent risk measures for Global, Switched stocks and control stocks samples.