The Chinese Trading Halt Puzzle

Abstract

Chinese firms have the right to initiate trading halts with 42% of halts occurring after a price increase. We hypothesize and confirm that the reason halts occur after a price rise is to increase the information in price vis-a-vis increasing the signal to noise ratio. Halts following a price rise also add more value relative to a price decline. However, this option increases the cost of capital by 121 basis points. We show that price non-synchronicity, institutional ownership, accounting and microstructure variables predict a trading halt and explain the positive CARs after a halt. We find that halts attract mutual funds.

Keywords: feedback, trading, halts, fundamentals, noise traders, liquidity

JEL Classification: E44, G12, G14, N20, O16, O53