Does the Switch from OTC to the Exchange Alleviate a Firm’s Extent
of Financial Constraints – A Case of Taiwan Stock Market1
Chau-Chen Yang2
National Taiwan University
Cheng-Few Lee
Rutgers University
Yanxiang Gu
State University of New York
(Geneseo)
Yu-Jiun Chen
National Taiwan University
This paper aims to answer the question: “ Does the transferring from OTC to the
Exchange alleviate a firm’s extent of financial constraints?” Previous paper by Baker
et al. (1999) indicate that switching from OTC to an Exchange or from a small
exchange to a larger exchange will enhance a firm’s visibility, stock liquidity and
reputation. These benefits are supposed to alleviate the extent of the firm’s financing
constraints. Financial constraints here is defined as “frictions that prevent the firm
from funding all desired investments,” as defined by Lamont, Polk and
Saa-Requejo(2001). They mentioned, “The inability to fund investment might be due
to credit constraints or inability to borrow, inability to issue equity, dependence on
bank loans, or illiquidity of assets.”
Hence, a switch to TSE is supposed to enable an OTC firm to enhance its ability to
raise more funds when necessary. OTC firms’ extent of financial constraints may be
alleviated.
1. Examine empirically whether the switch to a larger Exchange will alleviate
the problem of financial constraints or not.
2. Do firms in the Exchange and firms in the OTC exhibit different extent of
financial constraints?
1
2
Sponsored by Taiwan NSC, project number: NSC 89-2416-H-002-074
Professor, Department of Finance, College of Management, National Taiwan University.
3. Do switchers and stayers exhibit similar degree of financial constraints?
I.
Introduction to Taiwan’s Stock Markets
Table 1 Statistics of Stocks Listed in TSE
Unit:NT$1,000,000.
Newly Listed
No.
Amount
40,122
Delisting
No.
End of Year
Amount
1991
24
1992
36
34,958
1993
29
45,796
1994
31
51,533
3
1995
41
50,838
1996
36
1997
No.
Amount
2
2,221
221
643,086
1
175
256
761,091
285
908,373
2,220
313
1,099,071
7
2,270
347
1,346,679
82,543
1
6,418
382
1,661,270
26
78,889
4
8,380
404
2,106,285
1998
35
171,026
2
437
2,734,075
1999
33
82,578
8
33,378
462
3,803,017
2000
80
207,220
11
43,686
531
3,661,357
2001
69
363,434
16
251,070
584
4,099,920
2002
85
413,911
31
459,002
638
4,443,007
2003
46
174,956
14
117,899
670
4,721,605
2004
38
150,381
10
69,180
698
5,058,080
*Data source: Securities and Futures Monthly (Taiwan), Vol.23, No.1, 2005.
Table 2
Statistics of Stocks Listed in OTC
Unit:NT$1,000,000.
Newly Listed
No. Amount
Delisting
End of Year
Switching
Delisted Total
to TSE
1991
5
1,572
1992
3
778
1
0
1
1993
3
715
3
0
3
1994
3
5,520
1995
29
162,283
1996
38
73,497
1997
41
38,618
3
3
6
1998
74
99,116
7
5
1999 102
130,434
13
2000 105
160,124
97
Amount
No.
Amount
9
3,777
670
11
4,470
1,781
11
3,958
14
9,793
41
173,005
79
264,133
38,096
114
314,886
12
106,727
176
381,391
1
14
52,084
264
513,759
61
8
69
85,369
300
676,245
96,668
48
16
64
170,404
333
681,336
2002 110
77,991
44
15
59
193,259
384
627,293
2003
83
48,281
24
20
44
83,573
423
639,472
2004
87
50,447
26
18
44
123,544
466
626,097
2001
2
0
2
1,275
*Data source: Securities and Futures Monthly (Taiwan), Vol.23, No.1, 2005.
As shown in Table 1 and Table 2, at the end of 2004, there are 466 and 698 listed
firms in the OTC and TSE respectively in Taiwan. Of the newly listed firms in TSE
during the period from 1991 to 2004, 232 firms are transferred from the OTC. Table 3
summarizes the allocation of industries of these switchers. The transferring reached its
peak in 2000 when the High-tech bubbles blew up worldwide. Figure 1 shows the
comparison between the number of transferring and the TSE stock index.
Table 3 Allocation of Industries of Switchers.
Figure 1 Comparison between the number of transferring and the TSE stock index.
II. Literature on Listing Changes and Financing Constraints
A. Listing Changes
Why do firms change listing? Relevant literatures indicate that there are multiple
reasons that may account for firms’ switching from the OTC to the exchange, or from
a smaller exchange to a larger exchange..
B. Financing Constraints
III. Research Methodology
A. Data
Financial data are obtained from TEJ (Taiwan Economic Journal) from 1991 to 2003.
Banking, insurance and security firms are excluded from the sample.
B. Hypothesis
C. Financial Models
1.To investigate whether the switching of listing has an impact on the capital
investments and the degree of financial constraints of listed firms in Taiwan?
A slope dummy regression approach will be used to examine the difference of the
regression coefficients before and after the dividend imputation.
(
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(2) Whether the results in (1) will be different for the OTC firms and the TSE
firms?
D. Econometric Model
IV. Empirical Results
V. Conclusions
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