A Study Of Trading Halt Period's Influencing Factors And Its Market Reaction In Chinese Stock Market

The Chinese capital market has been developing really fast in the recent years in accordance with the rapid development of China's economy. The number of investors has increased and people's passion on investing is growing. To make sure that investors are protected in the best way and the market runs stably, the listing rules regulate various reasons that should course trading halts. Compared with trading halt rules in western capital markets, the rules in China's capital market set too many routine halts and does not regulate enough measures to force companies to resume the stock in a limited time. As a result, there are many companies who constantly call for trading halts and sometimes extend the halt time period without restrictions. This makes transactions be forced to stop and slows down the efficiency of the market. Investors cannot sell or buy the stocks even if they can find the other side of the transaction in a certain price, which violates the original intensions of why trading halt policy should be in presence.Based on the above analysis, we raise the following two questions: firstly, is corporate governance structure a very important influence factor when companies decide on how long a trading halt should be? Do management and the largest shareholder have the incentives to extend the trading halt in order to stop the price from slumping? Secondly, how does the market react to the extension of the trading halt period?We did some empirical research on the long-term trading halts in China's capital market from the year 2005 to the year 2008, using event study and abnormal return method. The result shows that, when the reason for the halt is recognized as good news, management and the large shareholders tend to disclose the announcement immediately and resume the stock without any extension. However, the longer the halt period is, the higher the market abnormal return is. When the reason for halt is recognized as bad news, the large shareholders expect that the stock price would get better if they resume the stock trading later. However, under this circumstance the longer the halt period is, the worse the return would be.Based on the result of the research, we suggest that we should eliminate most of the unnecessary routine halts and set compulsory resumption policies on all kinds of trading halts. What is more, companies should not extend the trading halts when the reason is supposed to be bad news.