Takeover Possibility and Market Response to Loss News Under Chinese ST Delisting Regulation

Abstract

This study examines whether the market reaction to firms’ second consecutive loss news is influenced by the firms’ likelihood of being taken over. Firms with two consecutive losses in China are subject to the “special-treatment (ST)” delisting regulation. We have two important findings. First, ST firms with certain characteristics (i.e. smaller firms with lower beta, lower accounting performance, higher leverage, and larger ownership concentration) are more likely to be taken over. Second, the market returns for the second consecutive loss news are higher for firms with a higher likelihood of being taken over.

Keywords: delisting regulations, distressed firms, corporate governance, earnings management

JEL Classification: G33, G34, G38