TWO ESSAYS ON REGULATION AND TRANSPARENCY by ALEJANDRO SERRANO A ...

187 Pages·2013·1.22 MB·English

TWO ESSAYS ON REGULATION AND TRANSPARENCY

by

ALEJANDRO SERRANO

A Dissertation submitted to the
Graduate School - Newark
Rutgers, The State University of New Jersey
in partial fulfillment of the requirements
for the degree of
Doctor of Philosophy
Graduate Program in Management
written under the direction of
Professor Daniel Weaver
and approved by
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_________________________
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Newark, New Jersey

October, 2013
© 2013

Alejandro Serrano

ALL RIGHTS RESERVED
ABSTRACT OF THE DISSERTATION
Two Essays on Securities Regulation
By ALEJANDRO SERRANO

Dissertation Director:
Professor Daniel Weaver

This dissertation includes two essays. The first essay analyses the effect of
demutualization on the New York Stock Exchange (NYSE) and the Toronto Stock
Exchange (TSX). Exchanges have undergone significant transformations due to increased
competition but some changes have created conflicts of interest, particularly when
deciding which firms to delist. On the NYSE, delisting is an autonomous decision
whereas on the TSX, external regulators have a larger role. After collecting data from
involuntarily delisted firms that continue to trade on smaller listing markets between
2002 and 2009, I create a sample of 195 NYSE and 39 TSX firms. I calculate the
percentage spreads on firms from both exchanges and find that spreads are larger and
more volatile on the NYSE than on the TSX. These results are stronger after 2006, when
the NYSE went public. Similar results are obtained when I look at firms that were
delisted for trading below minimum quantitative standards.
The second essay studies the effect of post-transparency on the NASDAQ.
Transparency has been promoted by the SEC as a measure that can reduce transaction
costs and increase liquidity. However, empirical studies have shown that the benefits of
transparency have not been entirely positive across different markets. This paper
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contributes to the transparency literature by measuring the effects on transaction costs
after the implementation of the National Market System NMS. The paper looks at a
sample of 2,882 firms that have trading information 60 days before and after NMS and
were incorporated to the NMS between 1982 and 1989. The paper shows that spreads
decrease by 5 percent and spreads of a matching sample also decrease but at a smaller
magnitude. Another effect of transparency is a reduction of 41 percent in the volatility of
returns after firms start trading on the NMS. This paper also shows that the effects of
transparency are much stronger after removing firms that are already trading at very low
spreads prior to NMS.

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Acknowledgements

I am indebted to Professor Daniel Weaver for his guidance and patience. His meticulous
observations on my dissertation helped me delve into the research process. I am very
thankful to Professor James Bicksler for his continuous support and friendship
throughout the program. I also gratefully acknowledge the rest of my committee,
Professor Simi Kedia, Professor Ben Sopranzetti, and Professor Amber Anand for their
helpful comments and insightful questions.
I would also like to thank everyone involved in the Ph.D. in Management
program at Rutgers Business School, especially Dr. Glenn Shafer and Assistant Dean
Goncalo Filipe.
Finally, I thank my family for their encouragement and support.

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Table of Contents
Abstract ii
Acknowledgements iv
Table of Contents v
List of Tables viii
List of Figures x
Chapter 1: Demutualization and Exchange Regulation:
Involuntary Delisting in New York and Toronto 1
1.1 Introduction 1
1.2 Related Literature 6
1.2.1 Spreads and Uncertainty 6
1.2.2 Exchanges and Regulation 19
1.3 Exchanges, Regulation, and Delisting Process 29
1.3.1 Toronto Stock Exchange 29
Institutional Development 29
Regulatory Framework 31
Delisting Process 34
Provincial Securities Commissions and the TSX 36
Descriptive Delisting Process of Intervened Firms 39
1.3.2 New York Stock Exchange 44

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Institutional Development 44
Regulatory Framework 45
Delisting Process and Financial Disclosure 49
The SEC and Enforcement 55
Description of Firms Intervened by the SEC 60
1.4 Secondary Exchanges 67
1.4.1 Canada 67
TSX Ventures Exchange 67
NEX 69
1.4.2 USA 70
The Over the Counter Bulletin Board OTCBB 70
The Pink Sheets 71
1.5 Hypotheses 72
1.6 Data and Methodology 74
1.6.1 Data 74
1.6.2 Methodology 77
1.7 Results 78
1.7.1 Descriptive Statistics 78
1.7.2 Univariate Analysis 79
1.7.3 Before Delisting 82
1.8 Conclusion 86

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Chapter 2: Transparency and the Impact of the National Market System 108
2.1 Introduction 108
2.2 Related Literature 112
2.2.1 Theoretical Research 112
2.2.2 Post-trade Transparency in the Equity Market 121
2.2.3 Post-trade Transparency in the Bond Market 129
2.2.4 Experimental Studies 133
2.3 The National Market System 141
2.4 Hypotheses 144
2.5 Data and Methodology 147
2.6 Results 150
2.6.1 Descriptive Statistics 150
2.6.2 Univariate Analysis 151
2.6.3 Multivariate Analysis 153
2.6.4 Controlling for Collusion between Market Makers
and a Discrete Pricing Grid 158
2.7 Conclusion 159
References 170
Vita 176

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List of Tables
1.1 TSX listing requirements 89
1.2 Delisting process of firms removed from the TSX 90
1.3 Violation of market value listing standard on the TSX 91
1.4 Participation of Provincial Securities Commissions 92
1.5 NYSE continuous listing requirements 2002 – 2009 94
1.6 NYSE involuntary delistings and notices of noncompliance 95
1.7 NYSE and firms in the delisting process 96
1.8 Listing Fees NYSE 97
1.9 The SEC and delisted firms 98
1.10 NYSE delisted firms and trading on secondary exchange 99
1.11 Descriptive Statistics for firms delisted from the
NYSE and the TSX between 2002 and 2009 100
1.12 Percentage spreads on the NYSE 101
1.13 Percentage spreads on the TSX 102
1.14 Standardized percentage spreads on the NYSE and the TSX 103
1.15 Involuntary delisting on the NYSE and the TSX (2002-2009) 104
1.16 Involuntary delisting on the NYSE and the TSX (2002-2005) 105
1.17 Involuntary delisting on the NYSE and the TSX (2006-2009) 106
1.18 Involuntary quantitative delisting on the NYSE and the TSX (2002-2009) 107

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2.1 Summary statistics 162
2.2 Difference in means before and after NMS 163
2.3 Difference in means before and after NMS of firms that have a matching
sample 164
2.4 Regression results on quoted spreads with a matching sample 165
2.5 Regression results on volatility of returns with a matching sample 166
2.6 Regression results on difference of quoted spreads 167
2.7 Frequency of spreads 168
2.8 Regression results on quoted spreads greater than 0.25 169

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