Definition
Delisting refers to the removal of a publicly traded company’s stock from a stock exchange. This can occur for several reasons, including failure to meet the exchange’s financial or regulatory standards, a decision to go private, or a merger or acquisition. Once delisted, a company’s shares can no longer be bought or sold via the exchange.
Key Takeaways
- Delisting refers to the removal of a listed security from a stock exchange. The delisting can be voluntary or involuntary and mainly happens when a company fails to meet the requirements set by the stock exchange.
- Delisting often has negative implications for the company and its shareholders. It can result in the reduced liquidity of a company’s shares, making them harder to buy or sell. This can also make it more difficult for the company to raise future capital through another public offering.
- Despite its drawbacks, delisting can be beneficial in certain scenarios. For example, if a company has been acquired or gone private, delisting can help reduce the costs and management time required to comply with reporting regulations and other exchange requirements.
Importance
Delisting is a critical term in finance as it refers to the removal of a listed security from a stock exchange.
This process occurs when a publicly traded company fails to meet the exchange’s regulations, which may include failure to maintain minimum share prices, inadequate financial performance, or insufficient reporting.
Delisting denotes a negative connotation and can severely impact the company’s reputation, liquidity, and the ability to raise capital as the investors may lose trust in the company.
Hence, maintaining the terms of stock exchanges is crucial for companies to avoid the potential risks associated with delisting.
Explanation
Delisting refers to the removal of a listed security from a stock exchange. The purpose of delisting can vary significantly but primarily, it is undertaken when a company fails to comply with the regulations set by the stock exchange, or when a company decides to go private.
Regardless of the purpose, it is essentially used as a measure to maintain the integrity and standard of the stock market. This ensures that investors have accurate information that can guide their trading decisions.
When a company gets delisted, it doesn’t necessarily mean it’s going out of business, but it can certainly reflect financial instability. Delisting often leads to lowered visibility in the market, reduced liquidity, and potentially less interest from institutional investors, which can impact the overall value of the company’s shares.
Delisting can be either voluntary or involuntary, depending on whether the company itself wishes to be delisted or is forced to do so due to regulatory reasons.
Examples of Delisting
**Enron Corporation Delisting (2001):** Known as one of the most infamous scandals in financial history, Enron Corporation was delisted from the New York Stock Exchange (NYSE) in
Enron had misrepresented earnings and hidden debt, which led to its share price plummeting from $90 to less than $1 per share in a short period. This fraudulent behavior and financial failure triggered the delisting of Enron.
**Lehman Brothers Delisting (2008):** Lehman Brothers, a global financial services firm, filed for bankruptcy in 2008 due to massive losses associated with subprime mortgage crisis. Post bankruptcy declaration, its trading was ceased on NYSE. The firm, at the time of delisting, had over $600 billion in assets, making it the largest bankruptcy filing in U.S. history.
**Luckin Coffee Delisting (2020):** China’s Luckin Coffee was delisted from the NASDAQ in 2020 after the company publicly announced fabricated sales of about $310 million. Its stock price declined drastically almost overnight, leading to its delisting from the exchange.
FAQ on Delisting
What does delisting mean?
Delisting refers to the removal of a listed security from a stock exchange. The delisting can be voluntary or involuntary and usually happens when a company fails to meet the requirements set by the stock exchange.
What are the reasons for delisting?
A company may be delisted for a number of reasons such as bankruptcy, failure to meet minimum financial standards, merger or acquisition, or if it fails to comply with the regulatory requirements.
What is voluntary delisting?
Voluntary delisting occurs when a company chooses to remove its securities from a stock exchange. This often happens when a company decides it will benefit more from privatization or moving to over-the-counter (OTC) trading.
What is involuntary delisting?
Involuntary delisting takes place when a company fails to meet the rules and standards of the stock exchange. This could be due to financial instability, inadequate market capitalization, or non-compliance with exchange regulations.
What happens to shareholders when a company is delisted?
When a company is delisted, its shares will no longer be tradeable on that particular stock exchange. However, shareholders still own their shares and can choose to sell them on other platforms, such as over-the-counter markets. It is important to note that shares often lose value following a delisting, so shareholders are likely to receive less than their original investment if they decide to sell.
Related Entrepreneurship Terms
- Voluntary Delisting
- Involuntary Delisting
- Non-compliance
- Stock Exchange
- Shareholders
Sources for More Information
- Investopedia is a leading source of financial content on the web, with resources ranging from market news to retirement strategies.
- Nasdaq is a global electronic marketplace for buying and selling securities, as well as they provide insightful articles on various financial topics.
- The Balance offers clear, practical advice on saving money, paying off debt, investing and financial planning.
- Bloomberg provides data, news and analytics to professionals around the world, with a focus on finance and business-related topics.
