A note on trading mechanism and securities’ value: The analysis of rejects from continuous trade

Abstract

We examine 97 stocks that moved from continuous trade back to single daily auctions. The response to exit from continuous trade is almost a mirror image of the entry response documented in Amihud et al., 1997 (Amihud, Y., Mendelson, H., Lauterbach, B., 1997. Journal of Financial Economics 45, 365–390). Upon exiting continuous trade, stock liquidity, price accuracy, and value drop. An exception is, however, identified. Ten stocks that were omitted from continuous trade within three months of their addition have negative excess returns upon entry into continuous trade and positive excess returns upon exit. These immediate rejects had relatively low volumes before entering continuous trade, which suggests that for thinly traded stocks simple unassisted continuous trade may not be optimal.