Competition for Listings

Different firms choose different bourses

Firms that list on different stock exchanges have different characteristics. A paper published by the Centre for Economic Policy Research by Thierry Foucault, of the Hautes Etudes Commerciales School of Management in France, and Christine Parlour, of Carnegie Mellon University in Pittsburgh, examines why this is the case. It concludes that this diversity is the outcome of the variety of trading rules that are used by exchanges. They also argue that this variety is a way for exchanges to soften competition for firms’ listings.

The two economists look at how firms choose the place to make their Initial Public Offerings (IPOs). The exchanges themselves should act as ‘simple profit maximisers’ which depend on the listings they attract in two ways. There is a listing fee for firms and there are trading fees. In North America in 1996 listings accounted for about 31% and trading revenues for 28% of total income. The operations of different exchanges are different – they do not follow the same listing policy, nor the same trading technology or the same listing fees.

Comparing the positions of the NYSE and Nasdaq, one finds that listing fees on the former ‘are nearly an order of magnitude higher than those on Nasdaq’ but there is much evidence that trading costs are lower. A reason why an IPO might be influenced by trading costs is to be found in investor preference. Trading costs are borne by investors when they rebalance their portfolios. In anticipation of these costs, investors require a larger return on IPOs’ that are conducted on high trading costs exchanges. Therefore, the price at the listing can be higher where trading costs are lower.

The paper finds that competition induces exchanges to differentiate themselves, through a choice of trading system or listing requirements to relax the competition for listings. Large firms, with a large investor base, tend to list on exchanges with low trading costs and vice versa, all things being equal. It follows that IPOs’ characteristics on competing exchanges with different rules are different.

Notes for Editors:

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The Authors:

Thierry Foucault is based at the Hautes Etudes Commerciales School of Management, Jouy-en-Josas, France and is a Research Affiliate in CEPR’s Financial Economics research programme. Christine Parlour is based at Carnegie Mellon University, Pittsburgh.