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Why wish for a stock's listing to be 'upgraded' to a bigger exchange?


KinAlberta
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Question: Why wish for a stock's listing to be 'upgraded' to a bigger exchange? Why do people hope to see a small company they own tradable shares in, have the equity listed on a larger more prominent exchange?*  (I'm not considering OTC here but a move from a venture exchange, etc.)

 

I recently asked this question and have now come here for some expert education and opinion.

 

 

My uneducated view - so far.

 

- A more prominent exchange listing helps with retail investor exposure, helps with equity issues, sometimes required more stringent reporting (but at what cost in terms of listing/market data fees). 

 

- For those looking to sell, the announcement of a move to another more prominent exchange permits a selling opportunity (like a share split announcement). I guess the eventual addition to an index fund/etf.  (There's also risk with being dropped from an index.)

 

- The increased liquidity and equity issuance potential are both double edged swords to me. However, exposure and associated liquidity could be hugely important to some emerging tech and other companies that need to rapidly expand to grab market share and so, need to massively dilute existing shareholders to survive and grow.

 

 

So, everyone: Why else? What's so great about moving "up to" a NASDAQ, NYSE, TSX listing?  And why the blanket desire for this outcome among micro-cap investors no matter what the nature of their enterprise?

 

 

 

* I recently asked this on a small forum in regards to a small, rather unknown, emerging technology company with strong patents, positive cash flows and of course, loads of 'promise'.

I'm getting the typical; are you a moron like responses, a larger  more liquid, more trustworthy exchange with the whole _{type of tech}__ sector listed there...  Maybe I am a moron. :-)

 

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You said you exclude OTC, but that's probably the place where it makes most sense to upgrade.

 

I was just told yesterday by Fido that stock XXXX is blanket not available for purchase to Fido customers because

 

Opening transactions for Pink Sheets (without information) are not permitted because of the risks associated with these securities and all Microcap securities.

 

and

 

Effective on March 29, 2016, National Financial will no longer permit correspondents or their customers to effect new purchases of additional categories of securities. Specifically, the current prohibition regarding Caveat Emptor securities is being extended to cover OTC Pink-No Information and certain Grey Market securities. NFS is taking this action as a result of its regular review of internal policies in an effort to ensure that they are consistent with evolving industry standards and regulatory requirements.

 

So basically investors have hard time buying the shares in company X that would make the shares less likely to be liquid, reach "efficient market" price, etc. Do you or the company care? Maybe, maybe not. There can be arguments on both sides. E.g. if you're looking to hold the shares for 10 years and you don't care for liquidity and efficient market, then perhaps this is just fine - no rabble will buy shares and you can accumulate in peace for ages.

 

One argument for uplisting: if company wants to issue cheap debt, it's likely that better listing might mean cheaper debt.

 

I don't think there's a blanket argument in general though.

 

I have no clue about Canadian exchanges and their peculiarities.

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Thanks for a great reply.

 

Yes, OTC to a regular exchange would be good for most I'd guess.  (I have a couple OTC positions - and they have limitations. Can't hold in my Canadian RRSP, etc.)

 

One exchange to another? I'm not sure about.  Small company. You're finally seeing whatever developments come to fruition (likely having suffered past dilution).  So a speculative position becomes more predictable. So, intrinsic value is more discernible. Thus its worthy of large proportions of your portfolio allocation. Now, say you feel that the 'promise' is great. The share prices starts to rise as investors come around to the same way of thinking. Then curiously those same people start wishing for an upgraded listing to a more prominent exchange.

 

An investor with a good idea, seeing a company that is priced under it's intrinsic value, maybe vastly so, should want to continue to built a position in the company. A less prominent exchange choice would seem to me to be the logical wish.

 

Now, if the investor is retired and lacks additional money, has built as large a position as they can afford or handle or feel comfortable with or some other limiting reasons, then it makes sense to want higher exposure asap and intrinsic or better valuations.

 

However, investors in emerging companies, one would think, would want to invest long term and maximize their long term 'resk-adjusted' returns and not pump in order to dump - to then go on the hunt for another winner (possibly, actually - likely - a suboptimal choice compared to the one they just sold).

 

A terse response I received included the comment that the other exchange included: "... much higher multiples " for that sector. 

 

To me that statement reflects a desire to attain higher pricing and then dump and not hold and/or accumulate.  Getting on the, right higher-multiple, bandwagon though would be great for equity issuance though wouldn't it?

 

 

 

The cost of debt / debt issuance I don't know enough about but wondered about. Why would the listing matter. The financials should matter hugely, but the exchange?

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The cost of debt / debt issuance I don't know enough about but wondered about. Why would the listing matter. The financials should matter hugely, but the exchange?

 

Exchange might matter in terms of connections with investment banks that might be more willing to do bond sale for a company listed in more prominent exchange. But, yeah, I don't know enough either. Just thinking aloud.

 

Take care.

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I think it would seldom be the absolute best option for unlocking of value, but sometimes it is good enough to be desirable. Other times it doesn't really matter or is a small negative in terms of cost.

 

For example I own an OTC traded company which trades by appointment and pretty much always at somewhat big discounts to book. The best solution to this for me would be buyback tenders or maybe an MBO at a good premium. Higher dividends would probably also be superior. But a listing might still yield better annualized results than them doing nothing and me just holding it for 10 years without the gap towards intrinsic value shrinking.

 

If this is in the interest of the majority shareholder, I'm not going to complain about it. But it's not eminently clear which is best of maybe being able to buy more at a cheaper price or having a better chance at getting out of the stock at a higher price/book and/or with smaller spreads.

 

Also, your position could be maxed out portfolio allocation wise, in which case you can't really take advantage of a lower price.

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And then of course there are all the meta factors: more stringent rules might mean that you can have more  trust in the accounting, it might mean that insiders have a rosy view of the future, it might mean they want to have exposure in order to attract suitors for the company etc etc.

 

All of this is idiosyncratic to each company, though, so it's hard to make blanket statements. It all depends on ownership structure, capital needs and so on. Sometimes the visibility is good for the company's business prospects even though that aspect probably is way oversold.

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I think we need to approach it from at least two perspectives. The company, or more accurately the management of the company, might have some short term vested interests in seeing shares trade on another exchange. Should the sector be evidencing a "high multiple" on another exchange then bonuses may flow. An opportunity to option up and then bail out or whatever.

 

Shareholders? Well, short term flippers vs long term holders have very different perspectives.

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