Effectiveness and Market Reaction to the Stock Exchange's Inquiry in Australia

Abstract

This paper examines a unique stock market monitoring program used by the Australian Stock Exchange (ASX). When the ASX observes unusual share price or trading volume changes of a listed company, it sends a letter demanding an explanation. Companies need to respond publicly to several stylized questions. Such public communications between the stock exchange and listed companies contain information. This paper documents how companies respond to the ASX inquiry and how the market reacts to the replies. It is found that some companies do release new information to the market when asked. After the firm's reply is posted, the average trading volume and the bid-ask spread are reduced, and in most cases, the share price is also stabilized with the following two exceptions: (1) The price will continue to rally on average if the company releases only partial information when questioned after a significant price jump; (2) The downward price trend will be reversed if the company states that no new information could explain the decline. Furthermore, there are statistically significant, positive abnormal returns for the first five trading days, which are not conditional upon the replies firms give to the ASX inquiries.