Market Response to Liquidity Improvements: Evidence from Exchange Listings

The study examines a sample of 895 stocks that moved from Nasdaq to the New York Stock Exchange or to the American Stock Exchange (Amex) between 1971 and 1994. We show how various measures of liquidity such as the bid‐ask spread, trading volume, and stock price precision improve in somewhat different ways upon transfer to NYSE (Amex). We also find that reductions in trading costs (percentage spread) and in pricing error volatility (Hasbrouck's σ₅) can explain most of stock market's positive response to exchange listing. Thus, liquidity has many facets and cannot be represented by the bid‐ask spread alone.