Information effect of involuntary delisting and informed trading

• Analyzing information effect of involuntary delisting and informed trading.
• Stock prices fall by 80-90% due to involuntary delisting in the Korean market.
• Individuals are net buyers of delisted firms while institutions and foreigners are net sellers.
• Share ownership of large shareholders declines prior toinvoluntary delisting.
• There is wealth transfer from idividual investors to large shareholders.

This paper analyzes the information effect of involuntary delisting and the possibility of informed trading in the Korean stock market. We find that the abnormal return is between 80% and 90% due to involuntary delisting in the Korean market, where liquidity all but disappears as a result of delisting. Prior to delisting, however, domestic individual investors are net buyers of delisted firms while both domestic institutional investors and foreign investors are net sellers. On the other hand, the share ownership of large shareholders, on average, declines by more than 30% over the course of two years prior to involuntary delisting. Using delisting probability model, we find that the change in the share ownership of large shareholders is a significant predictor of delisting while that of domestic institutional investors and foreign investors is not. Our findings suggest that large shareholders reduce their share ownership in anticipation of delisting and that there is a wealth transfer from individual investors to large shareholders surrounding involuntary delisting in markets where the separation between ownership and control is weak and the participation of retail investors is large.