AN INVESTIGATION OF S. E. C. TRADING SUSPENSIONS

JOHN STUART HOWE, Purdue University

Abstract

Government regulation of markets has long been a subject of debate for economists (and others). In spite of this attention, the actual impacts of specific regulatory actions have received relatively little empirical investigation; people often merely assume a close correspondence between realized and intended outcomes. However, recent studies have questioned the efficiency of various types of capital market regulation (accounting disclosure requirements and restrictions on insider trading, for example) in achieving the purposes for which they were intended. Given this potential for divergence between the intended and actual results of regulatory measures, the empirical examination of the impacts of specific regulatory actions is a worthwhile undertaking. The regulatory arsenal of the United States Securities and Exchange Commission (SEC) comprises a wide variety of powers. Among these powers, the SEC has the right to suspend trading in any or all corporate securities traded on organized exchanges and in the over-the-counter (OTC) market. It is the power of suspension upon which this study focuses. Trading suspensions are relatively infrequent regulatory events. In the period 1959-1979, the SEC averaged about 60 suspensions per year. Of these, only about eight (per year) were suspensions of securities traded on either the New York or American Stock Exchange. Suspensions of OTC securities therefore constitute a substantial majority of all suspensions. Using a variety of models of expected returns, abnormal performance measures (actual minus expected returns) are constructed for each suspended security for the periods just prior to and just after suspension. Two persistent phenomena appear in the data from both the sample of exchange-traded stocks and the OTC sample. First, there is a significant negative abnormal return over the suspension period. Second, there is a strong tendency for suspended stocks to rebound on the second day of trading following reinstatement of trading. The rebound, however, is of much smaller magnitude than the negative return over the suspension period. Thus, a trading suspension is typically a consequential and adverse event in the life of a corporate security. Possible explanations for the coincidence (we hesitate to assign causality) of SEC trading suspensions with negative abnormal returns are explored in this study, although no definite conclusions are possible. Finally, in addition to the examination of suspended securities, this investigation also demonstrates that a suspension is a quite different event than an exchange-initiated trading halt (halts have been the subject of previous studies).

Degree

Ph.D.

Subject Area

Finance

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