Bonding and the agency risk premium: An analysis of migrations between the AIM and the Official List of the London Stock Exchange

• Firms migrating between the London Stock Exchange main and AIM sections are studied.
• Firms migrating to the main section exhibit positive preannouncement returns.
• Firms migrating to the main section exhibit positive announcement day returns.
• Firms migrating to the main section exhibit negative post implementation returns.
• Opposite results are found for firms migrating to the AIM section.

Firms that change their listing from the less regulated AIM to the more regulated main section of the London Stock Exchange exhibit positive abnormal returns on the announcement day. For firms moving in the opposite direction, both announcement and implementation day abnormal returns are negative. Following implementation, the pattern is reversed for both categories of firm. We show that differences in liquidity, conventional risk factors and in medium to long term firm survival rates between the two listing regimes do not explain the observed patterns of returns, suggesting that the answer lies in the different bonding requirements of the two market segments and an agency risk premium.