Why do companies delist voluntarily from the Stock Market?

The last few years have seen an increasing number of firms delist from London's Alternative Investment Market (AIM). Nearly half of such companies opted for voluntary delisting. This is where firms notify the stock exchange (at least 20 days before the delisting) that they wish to cancel their trading, seek and receive approval from no less than 75% of shareholders, and then become private.

This paper examines the motives behind voluntary delistings and the consequences that can occur from companies taking this route.

It seems likely that such firms came to market to rebalance their accounts rather than to raise finance to seek growth, and there is evidence that these firms delist voluntarily from AIM because their leverage remains relatively high during their quotation. This may be partly because they were unable to raise the funds to rebalance their capital structure. With low prospects for growth and profitability they generate negative returns during the period in which they are quoted, meaning they are less likely to achieve their original aim. Ultimately the cost of listing outweighs any benefit received. Consequently a voluntary delisting is sought.

This presents existing shareholders with two options - they can either sell their shares before the delisting date, or retain them in the resultant private firm. They are the main losers in this process as their losses are substantial in the pre-delisting period and, on the announcement date of the delisting, the share prices go down drastically. The evidence here suggests that coming to market in the first place was the wrong decision, and shareholder value has been eroded as a result. It seems as if these companies came to the market at high price, then left to drift down and be taken private at low prices. The question policy makers need to address is how to prevent such cases, as they present a hugely negative image of the London Stock Market.

To the best of our knowledge, no previous study investigates the determinants and the consequences of the specific voluntary delisting decision under the UK institutional setting, where firms are allowed to delist and still have their shares traded in the private market.

The full research paper is in the Journal of Banking and Finance, Volume 37, year 2013, pages: 4850-4860.