The Delisting Bias in CRSP's Nasdaq Data and Its Implications for the Size Effect

Abstract

We investigate the bias in CRSP's Nasdaq data due to missing returns for delisted stocks. We find that the missing returns are large and negative on average, and that delisted stocks experience a substantial decrease in liquidity. We estimate that using a corrected return of Ϫ55 percent for missing performance-related delisting returns corrects the bias. We revisit previous work which finds a size effect among Nasdaq stocks. After correcting for the delisting bias, there is no evidence that there ever was a size effect on Nasdaq. Our results are inconsistent with most risk-based explanations of the size effect.EACH YEAR, MANY OF THE STOCKS TRADED on Nasdaq are delisted from the system and cease to be traded there. Delistings occur for a number of reasons including merger and acquisition, bankruptcy, liquidation, or migration to another exchange. They usually coincide with significant firm-specific events, so the returns associated with delistings are often sizable. Further, a stock's liquidity can change dramatically upon delisting, affecting the price at which shareholders can sell their shares. The Center for Research in Security Prices CRSP! attempts to systematically collect delisting returns; however, the task is difficult, and many returns are not collected. Some categories are missed more often than others. Specifically, delisting returns associated with poor firm performance~e.g., bankruptcy or failure to meet capital requirements! are missed much more often than returns associated with neutral or good firm performance~e.g., merger, acquisition, or migration to another exchange!. Since most of the missing delisting returns are associated with negative events, a significant bias exists in the data.We study this delisting bias in two ways. First, we document the magnitude of the bias. We investigate when and how often delisting returns are not collected by CRSP, and we estimate the average size of the missing returns. In this way, we extend to Nasdaq the work of Shumway~1997! which examines the delisting bias in CRSP's NYSE and AMEX data. The bias in the Nasdaq data is much larger-on average, 1.2 percent of NYSE and AMEX stocks are delisted for poor performance each year but 5.6 percent of Nasdaq stocks are delisted each year for similar reasons. Delistings are most fre-* University of Michigan Business School. We thank Dmitry Davydov for superb research assistance. We also thank Gene Fama, Mark Mitchell, René Stulz, an anonymous referee, and participants at a seminar at the University of Michigan for helpful comments.

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“…Chan, Hamao and Lakonishok (1991) contend that the statistical significance of market capitalization variable is sensitive to the specification of the model. Shumway and Warther (1999) find there is no size effect after correction for delisting bias. Knez and Ready (1997) point out that the size effect is not robust to the removal of extreme observations.…”

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“…Macey et al (2008) describe involuntary delistings as 'traumatic events' adversely affecting both the delisted firms and their investors. Economic costs associated with delisting include a significant decline in the stock price, increased stock return volatility, increased bid-ask spreads and for some firms also a decrease in trading volume (Baker and Meeks 1991;Harris et al 2008;Macey et al 2008;Sanger and Peterson 1990;Shumway 1997;Shumway and Warther 1999). In addition, managers may also be concerned that delisting may threaten their career prospects and that it may trigger an outside intervention from the board of directors or active owners.…”