Differences in the Risks and Returns of NYSE and NASD Stocks

Eugene F. Fama, Kenneth R. French, David G. Booth, Rex Sinquefield
1993 Financial analysts journal  
NYSE stocks have higher average returns than NASD stocks of similar size. This study finds that the higher NYSE returns are compensation for higher risks. Measured by book-to-marketequity ratios, NYSE firms are more distressed than NASD firms of similar size. Moreover, NYSE stocks are more sensitive to the risk factor in returns related to distress. The premium for this risk explains the higher NYSE returns. Stocks on the New York Stock Exchange (NYSE) have higher average returns than stocks of
more » ... urns than stocks of similar size (market capitalization) on the National Association of Security Dealers (NASD) system. For example, for stocks in the smallest-size quintile, the annualized monthly NYSE return for July 1973 to December 1991 is almost 4% greater than the NASD return. The puzzling difference between NYSE and NASD returns has attracted much attention, and it has caused some portfolio managers to eschew NASD stocks. Reinganum suggests that the difference between NYSE and NASD returns is due to liquidity.1 He argues that trading costs for small stocks are higher on the NYSE than on the NASD system, and that the higher NYSE returns are compensation for these higher costs. We offer an alternative explanation: Higher NYSE returns are compensation for higher risks. ca uJ z 4 4 z D -J m z z -J U z Z m 0) LL z z :D LU :D z 5 z 41
doi:10.2469/faj.v49.n1.37 fatcat:4npeklafj5asbc7t4gbecjgqdm