An Empirical Study of China’s Second Board

Abstract

In this paper, we conduct a comprehensive study on China's second board, ChiNext. We compare ChiNext against other major second boards in the world to assess its performance in attracting new listings and facilitating capital raising. We find that it has fared very well in these aspects. We examine the firm characteristics, pre-IPO operating performance, and governance practices and ownership structures for 355 ChiNext firms. We find that these are young and small firms that are profitable and experiencing high growth. They generally adopt good governance practices. Their ownership remains to be highly concentrated after their IPOs. We explore the determinants of IPO underpricing and find that IPOs of larger and more profitable firms are less underpriced, while those of firms with high volatility are more underpriced. IPOs conducted in a hot IPO market are less underpriced. In addition, investors may perceive the length of the time interval between the IPO issue date and the listing date on ChiNext as a signal of firm quality: the longer it takes a firm to list its IPO shares on ChiNext, the more its shares are underpriced. Our paper contributes to the IPO literature, provides insight into Chinese private enterprises, and sheds light on factors affecting the success of a second board.