| Abstract | The trading halt system was originally designed to protect the interests of investors, but it is highly controversial when exercised in practice (Huang, 2003; Kim & Yang, 2004; Frino et al., 2011). Since established in China in 1998, the trading halt system has been exercised for nearly 20 years. However, in recent years, voluntary trading halts of listed companies occurred frequently in the Chinese market, which attracted close attention from the Chinese regulatory institutions and international investors. The new phenomenon of voluntary trading halts differs from that in developed markets in that listed companies apply for trading halts arbitrarily, have too long periods of halting, do not follow relevant standard procedures, and fail to disclose information adequately. Within the range of literature retrieved by us, existing studies have not given a systematic classification and an empirical test of this phenomenon. Therefore, do voluntary trading halts in the Chinese market indeed harm the interests of investors? How serious is the harming? And what is the mechanism of such behaviors?
To answer these questions above, firstly, we analyze the present situation of trading halts in China, and make theoretical analysis about how the voluntary trading halts could undermine the interests of investors by facilitating the private benefits behaviors from insiders. Secondly, voluntary trading halts are defined in detail in this paper, from the perspectives of too long halting periods and inadequate information disclosure, in accordance with the regulations enacted by the Shanghai Stock Exchange and the Shenzhen Stock Exchange of China in May 2016. Lastly, the method of event study is employed to test the impacts of voluntary trading halts on the interests of investors, based on the data of listed companies in China from June 2014 to May 2016.
The empirical results show that the voluntary trading halts cause significantly negative excess returns to investors, no matter using total sample or PSM matched sample; during the voluntary halting period, it is more likely to emerge the private benefits behaviors from insiders in the company; if the private benefits behaviors occur during the halting period, negative excess returns caused by voluntary trading halts will be bigger. Besides, we also find that the institutional investors will be more probably to sell the shares after the voluntary trading halts. These results mean the voluntary trading halts in the Chinese market do not achieve the original intention to protect the interests of investors, but end up causing harm to them by facilitating the private benefits behaviors for some insiders. Therefore, in order to promote the effectiveness of the trading halt system, it is not only needed for relevant Chinese authorities to keep following the thought of “new regulations”, which emphasize the requirements on the periods of halting and information disclosure; it is also necessary to pay great attention to the market global design which could regulate the halting behaviors and the private benefits behaviors together.
We contribute to the literature mainly lie in: Firstly, the current theoretical explanations about trading halts on investors’ interest mainly come from cooling-off hypothesis and learn-by-trading model, which are both from developed markets. However, the operation of trading halts in China is different from that in developed market. Therefore, based on the Chinese capital market, this paper gives a new explanation that the voluntary halts could undermine the investors’ interest by facilitating the private benefits behaviors from insiders. Secondly, existing studies on the trading halts in the Chinese market mainly focused on the types of halts in the early stage, such as routine halts and halts for abnormal fluctuations, however, there are few studies on the problem of voluntary trading halts that highly concerned international investors in recent years. To the best of our knowledge, this paper is the first to provide a systematic classification and an empirical test of the voluntary trading halts. Thirdly, it is always widely recognized as controversial whether the trading halts can protect the investors’ interests (Huang, 2003; Kim & Yang, 2004; Frino et al., 2011), but relevant evidence mainly concentrates in the developed capital markets. This paper studies the samples of trading halts in China, providing new evidence for this topic from an emerging market.
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