to the NYSE are likely to be followed by multiple analysts and therefore
have low informational signaling value during the prelisting period, it is
more than likely that the price increase is a direct result of greater liquidity.
This is further supported by the fact that charters of many mutual and pen-
sion funds preclude them from investing in non-NYSE-listed stocks. By
moving to the NYSE, firms significantly increase the demand for their stock
by the institutional investor community. Hence, one can reasonably con-
clude that the average 7 percent price rise is predominately due to greater
liquidity during the postlisting period. If we assume that moving from pink
sheet status to the Nasdaq has the same liquidity benefit that moving from
the Nasdaq to the NYSE does, then moving from the OTC to the NYSE
amounts to a minimum 14 percent price appreciation, with the remaining
11 percent (25% −11%) due to information signaling. This 14 percent
translates into a discount of 12.3 percent. This means that the pure liquid-
96 PRINCIPLES OF PRIVATE FIRM VALUATION
TABLE 6.1 Summary of Abnormal Returns Analysis of 153 OTC Stocks That
Listed on the NYSE over the Period 1966–1970 for the 105 Event Weeks Sur-
rounding the Week of Announcement
Event Average Cumulative Average
Week Abnormal Abnormal Return (d), Percent
(a) Return Z Statistic Begins in week − 52 Nonnegative
− 9 0.0108 3.01† 0.1639 0.58†
− 8 0.0087 2.52‡ 0.1725 0.56†
− 7 0.0079 2.15‡ 0.1804 0.52
− 6 0.0079 2.06‡ 0.1883 0.51
− 5 −0.0018 −0.62 0.1865 0.42
− 4 0.006 1.7 0.1925 0.54
− 3 0.0003 0.3 0.1928 0.46
− 2 0.0056 1.5 0.1984 0.53‡
− 1 0.0104 2.73† 0.2088 0.51
0 0.0088 2.44‡ 0.2176 0.52
1 0.0088 2.32‡ 0.2263 0.52
2 0.0012 0.52 0.2275 0.45
3 0.0031 0.78 0.2306 0.49
4 0.0098 2.76† 0.2404 0.52
5 0.0116 2.55‡ 0.252 0.52
6 −0.0003 −0.31 0.2517 0.48
7 0.0064 2.19‡ 0.2581 0.48
8 0.0082 1.62 0.2663 0.51
*(a) Week relative to the week of listing on the NYSE.
†Significant at the 0.01 level.
‡Significant at the 0.05 level.