DOI: 10.1057/9781137361301.0001 Risk and Trading on London s Alternative Investment Market
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Risk and Trading on London s Alternative Investment Market: The Stock Market for Smaller and Growing Companies John Board ICMA Centre, Henley Business School, University of Reading, UK Alfonso Dufour ICMA Centre, Henley Business School, University of Reading, UK Yusuf Hartavi ICMA Centre, Henley Business School, University of Reading, UK Charles Sutcliffe ICMA Centre, Henley Business School, University of Reading, UK and Stephen Wells Visiting Fellow, ICMA Centre, Henley Business School, University of Reading, UK DOI: 10.1057/9781137361301.0001
John Board, Alfonso Dufour, Yusuf Hartavi, Charles Sutcliffe and Stephen Wells 2015 Softcover reprint of the hardcover 1st edition 2015 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6 10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2015 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave and Macmillan are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN: 978 1 137 36131 8 EPUB ISBN: 978 1 137 36130 1 PDF ISBN: 978-1-349-47228-4 A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. www.palgrave.com/pivot doi: 10.1057/9781137361301
Contents List of Figures List of Tables Acknowledgements vi vii ix 1 Introduction 1 2 Activities 3 3 Interviews 5 4 Literature Review 7 5 Empirical Analysis 31 6 Preliminary Data Analysis 41 7 Volatility Estimation 49 8 Basic Analysis of Relative Volatility 54 9 Relative Risk Allowing for Size, Age or Liquidity 58 10 Regression Analyses with Multiple Variables 64 11 Market-Switching Stocks 73 12 GARCH Analysis of Switchers 83 13 Conclusions 87 Appendix: Mean of Dummy Variables for all Estimated Regression Models 93 Bibliography 96 Index 109 DOI: 10.1057/9781137361301.0001 v
List of Figures 5.1 Number of listed stocks 35 5.2 Market leavers 40 6.1 Market capitalization bands 42 6.2 Comparative industry groupings 43 6.3 Companies by sub-sectors 45 6.4 Age distribution for AIM and Main Market stocks 46 6.5 Relative ages of AIM and Main Market stocks 47 6.6 Trading frequencies AIM vs. Main Market 47 8.1 Relative volatilities of AIM and Main Market stocks 55 8.2 Relative volatilities of AIM and Main Market stocks based on trades 56 9.1 Relative volatility by market capitalization 59 9.2 Relative volatility by industry 60 9.3 Relative volatility by firm age 61 9.4 Volatility by trading frequency 62 9.5 Average of risks for AIM and Main Market stocks 63 11.1 Capitalization of switching stocks 76 11.2 Relative risk analysis for switchers 76 11.3 Relative post- to pre-switch volatilities 77 11.4 Relative risk analysis controlling for market risk 79 11.5 Relative volatility analysis for switchers, AIM to Main Market 80 11.6 Relative volatility analysis for switchers, Main Market to AIM 81 12.1 FTSE 100 log returns over the entire sample period 85 vi DOI: 10.1057/9781137361301.0002
List of Tables 4.1 Number of companies listed on AIM and their market capitalization 11 4.2 AIM market capitalization in April 2014, by sector 12 4.3 Details of some of the larger junior exchanges in 2011 12 4.4 Small capitalization exchanges for which there is an empirical study 13 4.5 Studies of IPOs on small capitalization markets 15 4.6 Studies on IPO lock-ups on small capitalization markets 17 4.7 Studies on IPO values on small capitalization markets 17 4.8 Studies of the change in listing on systematic risk 22 4.9 Reasons for switching between AIM and the Main Market (1996 2009) 23 4.10 Reasons for switching between AIM and the Main Market (1996 2011) 23 4.11 Annualized standard deviation of daily returns 25 5.1 Eligible sample of stocks 33 5.2 Data cleanse 36 5.3 Corporate action adjustments 37 5.4 Number of companies leaving AIM 38 6.1 Mid-cap band representation 43 10.1 Possible risk factors for riskiness of AIM stocks 66 DOI: 10.1057/9781137361301.0003 vii
viii List of Tables 10.2 Control variables for regression analysis 67 10.3 Descriptive statistics for the dependent variables 67 10.4 Regression results for the first sample 68 10.5 Regression results for the second sample 69 11.1 Eligible sample of market-switching stocks 74 11.2 Average market capitalization of sample stocks 75 11.3 Market-switching stocks and volatility ratios by year and direction of transfer 78 11.4 Relative risk for switchers, combined samples 82 12.1 GARCH results for all switchers 86 12.2 Robust GARCH results for all switchers 86 DOI: 10.1057/9781137361301.0003
Acknowledgements This book had its origins in a piece of research carried out for the management team of the Alternative Investment Market (AIM). The authors wish to acknowledge the helpful comments of the AIM management team on this research as it progressed. The AIM management team also provided introductions to the interviewed nominated advisors, whom we wish to thank for their help. DOI: 10.1057/9781137361301.0004 ix