Summary:
The original intention of the trading suspension system in stock markets is to alleviate information asymmetry and facilitate the efficient integration of significant information into stock prices. The system requires listed companies to proactively apply for trading suspension and disclose significant information before its release, leaving investors sufficient time to evaluate the information and adjust investment strategies. This is intended to enhance price discovery efficiency upon resumption of trading and reduce price volatility (e.g., Greenwald and Stein, 1991; Kodres and O’Brien, 1994; Corwin and Lipson, 2000). However, as the authority to apply for suspension lies with listed companies, opportune suspension applications can be exploited by controlling shareholders to manipulate stock prices for personal gains. Such suspensions, termed “arbitrary suspensions” by Shi et al. (2019), deviate from the original intention of the suspension system and can significantly harm market liquidity and resource allocation efficiency in the stock market. On May 27, 2016, the Shanghai and Shenzhen Stock Exchanges jointly issued a new policy guideline, which provided detailed and explicit regulations on compliant reasons for suspension, the duration of suspension, and disclosure requirements. This strengthened the cautious suspension obligation of listed companies and provided policy guidance at the institutional level to address the chaotic phenomenon of arbitrary suspensions. Detailed and explicit policy guidance helps investors identify arbitrary suspensions based on the new rules. When investors perceive negative signals or decisions from a company, they may “vote with their feet” to increase downward pressure on stock prices, negatively impacting the company's value and creating a form of market deterrence (Callen and Fang, 2015; Gu and Zhou, 2017). The issuance of the suspension rules in 2016 provided objective guidance and judgment criteria for arbitrary suspensions. Before the issuance of the guidance policy, it was difficult for the market to form a clear understanding of arbitrary suspensions, making it challenging to induce group behavior. The issuance of the suspension rules guided the market (including investors and listed companies themselves) to form a clear understanding of arbitrary suspensions. Considering this, our paper empirically investigates whether there is herding behavior in the arbitrary suspension decisions of companies at that time, specifically, whether companies' arbitrary suspension behavior manifests as “following the crowd” (following channel) or “learning from past experiences” (learning channel). Based on these hypotheses, this study employs a quasi-natural experiment using the 2016 new suspension rules and investigates the intra-industry peer effects of arbitrary suspensions among A-share listed companies before and after the new suspension rules. First, after issuing the suspension rules, we find that the existence of arbitrary suspensions in the previous quarter significantly reduces the probability of arbitrary suspensions by listed companies in the current quarter, indicating an industry-wide herding effect characterized by the learning channel. Second, after the issuance of the suspension rules, investors react significantly negatively to companies engaging in arbitrary suspensions. This market deterrence can provide warning signals to herd members, thereby restraining listed companies in the industry from imitating each other in arbitrary suspensions. Specifically, the new policy guides the market to identify and deter arbitrary suspension behavior by listed companies, thereby regulating their decisions through market mechanisms. Third, heterogeneity analysis finds that market punishment received by industry-leading companies after arbitrary suspensions has a stronger deterrent effect on herd companies, and companies with less listing experience and better corporate governance are more likely to reduce their motivation for arbitrary suspensions after observing market deterrence. In addition, the main findings hold after robustness tests such as supplemental sample periods and the use of propensity score matching to correct for sample selection bias. In conclusion, this paper explores the characteristics of arbitrary suspensions by listed companies from the perspective of herding effects. It finds the existence of a “learning from past experiences” industry-wide herding effect in arbitrary suspensions, providing new insights for regulatory authorities and investors to prevent and control arbitrary suspensions and enriching the literature related to factors influencing them by listed companies. The paper finds that market deterrence can trigger a “learning from past experiences” herding effect, thereby serving as a collective force in assisting policy guidance to regulate listed company suspensions. It provides empirical evidence for the comprehensive use of policy guidance and market deterrence to address the chaotic phenomenon of arbitrary suspensions by listed companies while responding to the principle of non-intervention and maximizing the role of market deterrence in institutional building in the capital market.
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