August 21, 2006
The Delisting Debacle
Apple's failure to file timely financial reports with the NASDAQ has caused the NASDAQ to issue a de-listing warning to one of its premier companies. Apple has refused to list on the NYSE for years, preferring the NASDAQ for its support of the high tech companies. Will NASDAQ make good on its threat?? Unlikely. Some are now calling for delisting decisions to be made by the SEC or for delisted stocks to trade with a symbol. Why? Delisting hurts shareholders (stock drops by up to 15% almost immediately on delisting), shareholders already hurt by the executives poor behavior that creating the delisting problem. The argument is bad. Listing standards are contractual, between listed companies and the exchange. The remedies are contractual. The advantage of contractual listing standards is that exchanges can compete with each other for standards that make sense, that justify investor confidence. SEC overrides would disable the system. Indeed, the SEC role should be to encourage exchanges to enforce their existing rules.
If exchanges want to trade delisted stock for a period under a new symbol, let this change their listing requirements. See if investors agree. Exhanges that fail to enforce listing standards for "special" companies lose credibility and listing with them loses value. [Ask the Asian stock exchanges that run on "discretion."]
As for the shareholders, they chose the executives and should suffer the consequences of their failures. De-listing is a consequence. Shareholders in the future may demand better financial reporting integrity. Stock markets do not flourish because we erect safety nets after the fact for failed risk. Investors in Apple to the risk that the managers would report accurately; they were wrong, it is not unfair that they suffer the consequences.
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