Trading Halts and Fundamentals

Chinese firms have the right to initiate trading halts. We hypothesize that firms suspend trading to align stock prices with fundamentals. We find 46.5% of halts come after a four-day positive return. While many plausible reasons exist for halts to occur after a price decline, we argue the only reason for halts after a price rise is to align prices with fundamentals. However, this option increases cost of capital by 121 basis points. We show that stock volatility, institutional ownership, accounting and microstructure variables predict a trading halt and explain the positive CARs after a halt. Halts attract mutual funds