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Why Luckin Coffee Stock Plunged 50% Today

By Joe Tenebruso – Jun 26, 2020 at 11:24AM

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The troubled coffee shop chain is being booted from a major stock exchange.

What happened

Shares of Luckin Coffee (LKNC.Y 0.55%) plummeted on Friday after the Chinese coffeehouse company disclosed that it will be delisted from the Nasdaq Stock Market.

As of 11:11 a.m. EDT, Luckin's stock was down 50%.

So what 

Luckin Coffee received its first delisting notice from Nasdaq on May 15. The exchange warned that it intended to delist Luckin's shares after the company fabricated transactions and failed to disclose material information to investors. Luckin said at the time that it would request a hearing with Nasdaq in an attempt to keep its shares trading on the exchange.

Luckin received a second notice from Nasdaq on June 17. This time, it warned Luckin that its failure to file its annual report would be an additional basis for delisting its shares. 

A stock chart falls then rises then falls again.

Luckin Coffee's stock lost half its value on Friday. Image source: Getty Images.

Today, Luckin announced that it withdrew its request for a hearing with Nasdaq and would no longer seek to contest the delisting of its stock. As a result, Luckin's shares will be suspended from trading on the Nasdaq Stock Market at the open of business on June 29 and will be delisted once the appeal period has expired. 

Now what 

Luckin's stock will likely continue to trade on over-the-counter markets after it's delisted from Nasdaq. But the reason stocks tend to rise in value when they are first added to major exchanges is that there is more liquidity on exchanges, which makes it easier for investors to buy and sell shares. The reverse is also true: When a stock is delisted, fewer shares are traded, which makes it more difficult for large investors to enter and exit their positions without distorting prices.

Moreover, major exchanges like Nasdaq have listing requirements that establish minimum standards for financial reporting and other criteria designed to protect investors. Requirements on over-the-counter markets are typically much less stringent.

For these reasons, institutional investors and other professional money managers often sell stocks before they are delisted. This is likely occurring with Luckin Coffee and is no doubt contributing to the stock's brutal losses today.

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Luckin Coffee Inc. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.

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