Anything Wrong with Breaking a Buck? An Empirical Evaluation of Nasdaq’s $1 Minimum Bid Price Maintenance Criterion

Rhee, S. Ghon; Wu, Feng

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Anything Wrong with Breaking a Buck? An Empirical Evaluation of Nasdaq’s $1 Minimum Bid Price Maintenance Criterion

Journal of Financial Markets, Forthcoming

50 Pages Posted: 7 Oct 2011

See all articles by S. Ghon Rhee

S. Ghon Rhee

University of Hawaii at Manoa - Shidler College of Business; University of Hawaii at Manoa - Department of Financial Economics and Institutions

Feng Wu

University of Macau - Faculty of Business Administration

Date Written: October 3, 2011

Abstract

This paper empirically evaluates the effects of NASDAQ’s $1 minimum bid price threshold (known as the one-dollar rule) as part of its listing maintenance criteria. Even though this controversial rule was introduced as early as September 1991, its economic impact has been largely unexplored by academics. This study suggests that implementation of the one-dollar rule is justified for the following reasons: (1) NASDAQ stocks frequently trading below $1 during the pre-rule period are extremely vulnerable to catastrophic losses; (2) a dramatic decline in extreme loss probability is observed among low-priced (relative to $1) stocks after the rule was introduced; and (3) the $1 benchmark serves as an appropriate cutoff point in screening stocks listed on the exchange.

Keywords: Exchange listing standards, Low-priced stocks, Extreme tail risk, NASDAQ

JEL Classification: G10, G14, G18

Suggested Citation: Suggested Citation

Rhee, S. Ghon and Wu, Feng, Anything Wrong with Breaking a Buck? An Empirical Evaluation of Nasdaq’s $1 Minimum Bid Price Maintenance Criterion (October 3, 2011). Journal of Financial Markets, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1940443