An option valuation approach to gauge trading halt economic drivers and impact on listed firms

The main purpose of this paper is to estimate the economic factors that drive companies to institute the supervision or suspension of stock exchange-driven trading. To do this, we emphasize the analysis from the shareholder’s and creditor’s perspectives. Following an option-theoretical formulation, we explain why a bad news-related trading suspension should affect the most shareholders experiencing a lower financial burden and the least those experiencing the opposite. In contrast, creditors face a greater impact on their debt holdings if they have extended credit to the heavier debt-ridden category. In the middle, the situation is characterized by negative gamma for creditors and long gamma for shareholders, which leads to an asymmetric risk exposure. Empirical results confirm that management adheres to our theoretical classification. It uncovers alternative economic drivers influencing the probability of a supervision or suspension, depending on the membership of each of our identified classes. Variables explaining such an exchange’s ruling include the degree of economic distress, managerial inefficiency, company size, and the condition of the macroeconomic environment.