The information content of firms switching from section 2 to section 1 of the Tokyo stock exchange

Abstract

This paper analyzes the abnormal return behavior of 168 firms switching from section 2 to section 1 of the Tokyo Stock Exchange during 1984-92. Our study distinguishes itself from previous studies on listings because we examine the pricing behavior of firms on different segments of the same exchange in a market outside the US. Our results show that firms switching to section 1 earn statistically significant positive abnormal returns before the switch day. After the switch day, these firms earn statistically significant negative abnormal returns. We also find that firms with lower liquidity on section 2 respond more favorably to a switch than firms with higher liquidity on section 2. An examination of trading volume reveals a significant and persistent increase (decrease) in excess trading volume for firms with low (high) liquidity on section 2. Our results are consistent with the explanation that, at least for the less liquid stocks, there is persistent buying on the part of large mutual funds prior to a section switch. © 1997 Elsevier Science B.V.