Equity Trading Halts, Acquisition Announcements, and Investor Reactions: Evidence from an Emerging Market
A trading halt occurs when a firm temporarily suspends the trading of its equity. We examine whether and how such actions preceding acquisition announcements might impact upon subsequent stock market reactions to those events. Drawing from signaling theory, trading halts are depicted as intent signals that allow firms to disseminate information that an acquisition announcement is forthcoming, that the firm is seeking to make capital market trading more fair by reducing insider trading and information leakage, and ultimately preparing investors for the event. We predict a positive relationship between trading halts, acquisition announcements, and subsequent stock market reactions. Next, arguments from screening and priming theories link the halt’s duration to stock market reactions: longer halts allow for disseminating more information and building up investor anticipation, leading to a J-shape relationship between the halt’s duration, acquisition announcements, and investor reactions. We test these arguments using acquisitions in an emerging market, China. Findings support expectations. The relationships are robust to high technology industries, State ownership, and the timing of the halt’s completion relative to the acquisition announcement. Overall, trading halts appear to represent a strategic information device that firms can use to capture investor attention and stimulate interest in their major actions.