Which Firms went Public in China? A Study of Financial Market Regulation

SummaryPlagued by a notoriously weak legal system, China has developed an alternative governance system based on de facto regulatory decentralization in its financial market development, in which regional governments are responsible for selecting state-owned enterprises (SOEs) to go public. The effect of this regulatory system has been highly controversial but evidence is very scant in the literature. This paper shows that regional governments tended to choose better-performing SOEs in the pre-listing stage to go public, and thus substantial stock market investment funds were channeled into potentially productive companies. China’s experience demonstrates that administrative governance of capital markets may have been instrumental in jump starting capital markets in the absence of adequate market-supporting legal institutions.