Special Treatment Of Contagion Effects On The Industry And Competitive Companies

The system of Special Treatment (ST), which is a unique system implementedmerely in mainland China, has been playing an important role before delistingbad-performing public company from the stock market. Both this topic and thespillover effect, imposed by the significant devaluation information in TargetCompany towards the whole industry, are focused by the academic world.This thesis, based on data from manufacturing public company that has madeST announcement between2007-2013in Shanghai and Shenzhen Stock Market, triesto research the contagion and competition effects after ST announcement of TargetCompany, struggling to find out if the index of Concentration Ratio4, Debt AssetRatio, Current Ratio as well as the Asset volume of Target Company is correlated tothe whole effect.Through empirical research, we find that ST announcement is absolutely a badnews for both Target Company itself and competitors. When talking about5tradingdays before announcement day, however, the Cumulative Average Abnormal Returnof7.44%can be found among competitors of the same industry. It is also clearly thatwhole effects are positively correlated with CR4and Current Ratio, with insignificantcorrelation to Debt Asset Ratio and Asset volume of Target Company. Current Ratio ismore influential than CR4.We argue that when facing with competitors’ ST announcement, higher liquidityleads to higher investment confidence, which could avoid contagion and gaincompetition effects; lower industry competition leads to lower demand elasticity,which could prevent contagion effects from spreading and increase competitioneffects.