​Why can’t I trade? Exchange Discretion in Calling Halts Around Important Information Events

Stock exchanges are an important information intermediary that affect how information about firms enters price. Individual stock trading halts are a key tool that exchanges use to prevent extraordinary price volatility in the presence of new information. While halts may aid in mitigating volatility, they also intentionally delay the incorporation of information into price. We seek to understand whether and how exchanges exercise discretion in influencing prices by examining halt decisions. Using a sample of NYSE and Nasdaq halts from 2012 to 2015, we find halts to be frequent events (virtually all trading days have at least one halt with 97% having five or more). We find 1) an asymmetry in the use of halts depending on the direction of the underlying news, 2) NYSE uses fewer halts than Nasdaq, controlling for differences across exchanges and 3) both of these differences are concentrated in proactive halts, where discretion is expected to be high. Given this evidence suggesting stock exchanges use their discretion to affect how firm information is incorporated into price, we then evaluate the consequences of this discretion. To do so we examine the portion of discretion that cannot be explained by firm information and fundamentals and whether it is associated with market consequences. The evidence suggests that greater unexplained halt discretion increases both the likelihood of small halt returns (i.e., unnecessary halts) and stock return reversals after the halt.

 

Sarah Zechman is interested in firm communications, financial reporting choices, and managerial incentives. Before joining the Leeds School in 2015, she taught at the University of Chicago Booth School of Business and the Wharton School at the University of Pennsylvania. Zechman is currently a member of the editorial boards of the Journal of Accounting Research and The Accounting Review.  Her research has been cited in various press outlets including the Wall Street Journal, Financial Time and Bloomberg Businessweek.  In 2015, she was awarded the Best Paper award in financial accounting for “Executive Overconfidence and the Slippery Slope to Financial Misreporting” and, in 2009, she was awarded the Best Dissertation award in financial accounting for “The Relationship between Voluntary Disclosure and Financial Reporting: Evidence from Synthetic Leases,” both from the American Accounting Association. Prior to earnings her PhD, she spent several years at KPMG LLP, where she worked in transaction structuring services and business management processes. She is a certified public accountant and earned a BSBA in accounting in 1998 from Washington University in St. Louis, Missouri, graduating first in her class. In 2008, she completed a PhD in accounting from the Wharton School at the University of Pennsylvania

 

For further information and enquiries, please contact Adeline Tang at amytang@ntu.edu.sg.

 

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