The Certification Role of Listings.

I propose a model in which firms can convey their quality by listing on a stock exchange. To list, firms must comply with costly listing requirements allowing investors to recognize imperfectly their quality. A profit maximizing exchange may set listing requirements leading to high information efficiency in equilibrium. However, this is strongly linked to market conditions and firm characteristics. The information content of a listing depends not only on the level of listing requirements, but also on the characteristics of firms incited to list. High listing requirements are not a guarantee for the highest efficiency and the latter may be achieved with low requirements. Whether information efficiency is socially desirable depends on compliance costs and forgone growth opportunities which reduce welfare. The analysis yields implications for the choice of the listing locations by firms, as well as the organization of stock markets.Certification; Efficiency; Listing Costs; Stock Markets; Regulation;

Liquidity Effects of Listing Requirements.

I propose a model in which a stock exchange can improve its liquidity by tightening its listing requirements. Because these reduce information asymmetry, they increase the utility of investors and lead to a high investor participation on the exchange. However, the exchange never sets the highest possible level of listing requirements because investors also incur a risk due to more transparency. Their utility is concave in the level of listing requirements. This property determines the optimal decisions of an exchange as well as the social optimum. The level of listing requirements maximizing investor welfare depends on the sensitivity of the utility of investors to changes in liquidity and varies with the organization of listing and trading. A monopolist exchange always under-regulates if regulation is costly. Under- regulation is exacerbated if other trading venues free ride on the regulation and if the trading fee is determined by the level of listing requirements. While investors are better off if trading is separated from listing and is a competitive industry, an exchange has a higher profit when it is a monopolist in listing and trading.Stock Exchange; Regulation; Trading Volume; Competition; Liquidity;

Does inter-market competition lead to less regulation?

This paper presents a model to analyze the consequences of competition in order-flow between a profit maximizing stock exchange and an alternative trading platform on the decisions concerning trading fees and listing requirements. Listing requirements, set by the exchange, provide public information on listed firms and contribute to a better liquidity on all trading venues. It is sometimes asserted that competition induces the exchange to lower its level of listing standards compared to a situation in which it is a monopolist, because the trading platform can free-ride on this regulatory activity and compete more aggressively on trading fees. The present analysis shows that this is not always true and depends on the existence and size of gains related to multi market trading. These gains relax competition on trading fees. The higher these gains are, the more the exchange can increase its revenue from listing and trading when it raises its listing standards. For large enough gains from multi-market trading, the exchange is not induced to lower the level of listing standards when a competing trading platform appears. As a second result, this analysis also reveals a cross - subsidization effect between the listing and the trading activity when listing is not competitive. This model yields implications about the fee structures on stock markets, the regulation of listings and the social optimality of competition for volume. JEL Classification: G10, G18, G1

The Certification Role of Listings

The model developed in this paper shows that differences in incentives of firms to list can have an impact on the decision of exchanges concerning the level of listing requirements they set, and on the gains obtained by firms when they list on an exchange with stringent listing requirements. When firms bear listing costs that are uncorrelated with their quality, changing the level of listing requirements or introducing additional segments with different listing requirements changes the distribution of listed firms and affects thereby indirectly the values of listed firms. This indirect effect can either enforce or weaken the direct impact of more precise information on the value of firms. If the difference in the incentives to list among firms of the same quality is small, the exchange might be induced to set a high level of listing requirements, which leads to a high information efficiency in the economy. If these differences are large, the exchange never sets a high level of listing requirements and efficiency is impeded.listing, disclosure requirements, compliance costs

Does Inter-Market Competition Lead to Less Regulation?

This paper presents a model to analyze the consequences of competition in order-flow between a profit maximizing stock exchange and an alternative trading platform on the decisions concerning trading fees and listing requirements. Listing requirements, set by the exchange, provide public information on listed firms and contribute to a better liquidity on all trading venues. It is sometimes asserted that competition induces the exchange to lower its level of listing standards compared to a situation in which it is a monopolist, because the trading platform can free-ride on this regulatory activity and compete more aggressively on trading fees. The present analysis shows that this is not always true and depends on the existence and size of gains related to multi market trading. These gains relax competition on trading fees. The higher these gains are, the more the exchange can increase its revenue from listing and trading when it raises its listing standards. For large enough gains from multi-market trading, the exchange is not induced to lower the level of listing standards when a competing trading platform appears. As a second result, this analysis also reveals a cross - subsidization effect between the listing and the trading activity when listing is not competitive. This model yields implications about the fee structures on stock markets, the regulation of listings and the social optimality of competition for volume.competition in order flow, fragmentation, listing requirements, stock exchanges

Liquidity Effects of Listing Requirements

I propose a model in which a stock exchange can improve its liquidity by tightening its listing requirements. Because these reduce information asymmetry, they increase the utility of investors and lead to a high investor participation on the exchange. However, the exchange never sets the highest possible level of listing requirements because investors also incur a risk due to more transparency. Their utility is concave in the level of listing requirements. This property determines the optimal decisions of an exchange as well as the social optimum. The level of listing requirements maximizing investor welfare depends on the sensitivity of the utility of investors to changes in liquidity and varies with the organization of listing and trading. A monopolist exchange always under-regulates if regulation is costly. Under- regulation is exacerbated if other trading venues free ride on the regulation and if the trading fee is determined by the level of listing requirements. While investors are better off if trading is separated from listing and is a competitive industry, an exchange has a higher profit when it is a monopolist in listing and trading.ou

The Certification Role of Listings

I propose a model in which firms can convey their quality by listing on a stock exchange. To list, firms must comply with costly listing requirements allowing investors to recognize imperfectly their quality. A profit maximizing exchange may set listing requirements leading to high information efficiency in equilibrium. However, this is strongly linked to market conditions and firm characteristics. The information content of a listing depends not only on the level of listing requirements, but also on the characteristics of firms incited to list. High listing requirements are not a guarantee for the highest efficiency and the latter may be achieved with low requirements. Whether information efficiency is socially desirable depends on compliance costs and forgone growth opportunities which reduce welfare. The analysis yields implications for the choice of the listing locations by firms, as well as the organization of stock markets

The Certification Role of Listings

This paper proposes a model to analyze the conditions under which listing on a stock exchange certifies efficiently the quality of firms. It also establishes a link between the type of incentives which motivate firms to list, and the decisions of stock exchanges regarding listing requirements. Firms can convey their quality by listing on a stock exchange. To list, firms must comply with costly listing requirements allowing investors to recognize imperfectly their quality. According to the empirical literature, the costs related to the compliance with listing requirements can be substantial and can vary across firms. In the present model, firms differ in quality as well as in compliance costs and both characteristics are uncorrelated: among firms of the same quality, some bear high compliance costs while some bear small ones. Whether a listing is informative about the quality of firms depends on the dispersion of compliance costs among firms of the same quality. If the difference in compliance costs is small, firms of the same quality obtain a similar net gain from listing and listing certifies efficiently the quality of firms. In this case, the exchange might also be induced to set a high level of listing requirements leading to perfect information revelation. Otherwise, some good firms with high costs stop listing while bad firms with small costs still list. The infomativeness of a listing is small and information revelation is never perfect in equilibrium. The analysis yields implications on competition for listings, the organization of stock markets, the consequences of changes in listing requirements on the valuation of firms and the listing place choices of firms