Rejected Stock Exchange Applicants

Journal: Journal of Financial Economics

Date: 20210201

Author: Fjesme, Sturla L.; Galpin, Neal E.; Moore, Lyndon

Abstract:
We examine listing applications by firms to the London Stock Exchange between 1891 and 1911. The exchange rejected 82 (13.1%) of the 628 applicants to its main board. Accepted applicants were twice as likely to pay dividends (and to pay twice as much) and had longer firm lives than rejected applicants. Rejected applicants were more likely to file for liquidation than successful applicants. These results remain even after we control for the primary benefits of the listing itself: liquidity and future capital inflows. In this era, the London Stock Exchange could screen applicants for listing.

Link: Google Scholar

Key Findings

Screening Effect

The London Stock Exchange effectively screened firms - accepted firms had better survival rates, higher dividend payments, and fewer liquidations than rejected firms between 1891-1911

Application Success

Of 628 applicants to the LSE main board, 82 (13.1%) were rejected, demonstrating selective admission standards

Performance Outcomes

Accepted firms lived longer (35.5 vs 18.2 years), paid more dividends (50.5% vs 25.8% of years), and were more likely to merge (51.8% vs 29.3%) than rejected firms

Firm Survival and Exit Outcomes

Accepted firms had significantly longer average lifespans (35.5 years) compared to rejected firms (18.2 years)
51.8% of accepted firms ended through merger/acquisition vs only 29.3% for rejected firms
Rejected firms had higher rates of voluntary liquidation (46.3%) vs accepted firms (24.4%)

Dividend Payment Performance

Accepted firms paid dividends in 50.5% of their first 10 years vs 25.8% for rejected firms
Total dividend payments were 34.1% of par value for accepted firms vs 16.5% for rejected firms
Shows consistently better dividend performance for accepted firms

Application Processing Timeline

Accepted firms took 137.5 days on average from prospectus to application
Rejected firms took longer at 168.5 days from prospectus to application
Additional 88.8 days on average for successful firms to obtain official quotation

Contribution and Implications

First study to examine both accepted and rejected stock exchange applicants using historical records
Demonstrates that exchanges can effectively screen firms beyond just providing liquidity
Suggests stock exchanges played an important certification role in early financial markets

Data Sources

Survival and exit data from Table 3 "Firm outcomes (single share class firms)"
Dividend performance metrics from Table 3 and Table 7 "Dividend payments"
Application timeline data from Table 3 showing days to application and quotation