Delisting refers to the removal of a company's stock from a stock exchange, making its shares no longer publicly tradable on that exchange. It's a significant event for shareholders and can be prompted by a variety of reasons. In this article, we'll delve deep into the concept of delisting, its causes, implications for investors, and offer examples.
Causes of Delisting
Voluntary Delisting: A company might choose to delist its shares from the stock exchange. Such decisions are usually made when the company believes that it is in the best interests of its shareholders, often due to high listing costs or to pursue other financing alternatives.
Mandatory Delisting: This happens when a company fails to meet specific regulatory requirements set by the stock exchange. It can be due to non-compliance with financial standards, failure to maintain a minimum stock price, or unethical practices.
Merger or Acquisition: If a company is acquired or merges with another, its shares are often delisted, especially if it ceases to exist as an independent entity.
Bankruptcy: Companies that go bankrupt might be removed from the exchange as they can no longer meet the listing requirements.
Implications for Investors
Liquidity Concerns: Once a stock is delisted, it might be harder to buy or sell shares. While the shares might continue to trade on over-the-counter (OTC) markets, the volume is usually much lower, leading to reduced liquidity.
Share Price: Delisting often results in a decline in share price. The decreased liquidity and potential negative news surrounding the delisting can deter investors, exerting downward pressure on the stock.
Information Asymmetry: Listed companies are required to follow strict disclosure requirements, providing investors with regular updates about their financial health. Once delisted, these rigorous requirements disappear, leaving investors with less information.
Examples of Delisting
BlackBerry Ltd. (2020): BlackBerry, once a major player in the smartphone industry, announced it would delist from the Toronto Stock Exchange and the New York Stock Exchange in 2020. The decision was voluntary, part of the company's transition strategy to software and services from hardware.
Toys "R" Us (2017): The famous toy retailer's failure to revamp its business model and the heavy debt load led to its bankruptcy. Consequently, its shares were delisted from the stock market.
Enron (2001): A name synonymous with corporate fraud, Enron was delisted from the NYSE due to financial manipulations and accounting scandals.
What Should Investors Do?
If an investor holds shares in a company that has been or will be delisted, here are some steps to consider:
Stay Informed: Keep track of company announcements, news, and communications regarding the delisting. Understand the reason for delisting, as the nature of the issue might inform your next move.
Evaluate the Company: If the delisting is due to non-compliance or financial reasons, study the company's financial health to decide whether holding onto the stock makes sense.
Consider Selling Before Delisting: If you're concerned about reduced liquidity post-delisting or potential further depreciation of the stock price, consider selling the shares while they are still listed.
Over-the-Counter (OTC) Markets: Post-delisting, some stocks continue to trade on OTC markets. While they offer an avenue for trade, it's essential to be aware of the reduced liquidity and potentially higher volatility.
Delisting can be a pivotal event for a company and its shareholders. As with any investment decision, it's crucial to be informed, research thoroughly, and perhaps consult with a financial advisor to navigate such occurrences.