Misinformation and Regulatory Actions in the Canadian Capital Markets: Some Empirical Evidence

In this paper the effect of allegedly manipulative activities on stock returns and the effectiveness of trading suspensions in arresting such manipulations are empirically studied. The results from conducting both a Fama-Fisher-Jensen-Roll test and a portfolio test on the error terms computed from a single factor market in periods surrounding a trading suspension are presented. The findings clearly identify regulators as having access to predominantly unfavorable new information about allegedly manipulative activities that is not "fully reflected" in stock prices prior to a trading suspension. Furthermore, since unfavorable information disclosures during a trading suspension period are found not to be fully reflected in stock prices on the date of trading reinstatement, the market is deemed to be inefficient in the semistrong form.