Research On Reformulating Strategy Of China Growth Enterprise Market Delisting Policy

Since the first batch of 28 IPOs were listed for trading in 2009 in China's Second Board stock market, also called Growth Enterprises Market(GEM) in Shenzhen Stock Exchange, GEM had grown into a major stock market in less than 7 years, now with 512 companies listed, and a market capitalization of 5.2 trillion RMB, about 25% of China total domestic stock market capitalization by the end of June 2016. GEM has been growing into a major capital platform in terms of the number of listed company, daily volume, speed of growth, and market cap. While we fully recognize the importance of GEM and its contribution to China's economic growth, we must point out that there are still some areas requiring immediate attentions for improvement, especially the delisting policy and process, which could not function well to effectively remove those corrupted and broken companies from the stock market. There are still loop holes in the definition and execution of delisting; no early warning system to alert risks, nor sufficient insurance to protect investors from fraud and other illegal behaviors. Meantime, there are no clear channels for delisted companies to improve and continue raising fund for business.This research, based on institutional innovation theory, financial risk theory and stock market delisting research and practices from NASDAQ, aims at creating a feasible strategy to improve GEM's delisting policy, processes and procedures. By referencing to widely adopt quantitative models of Z-Score and O-Score, and famous KMV Merton Model, I built a China GEM Risk Forecast Model to calculate financial and default risks and generated the risky stock list in GEM. The study resulted in the proposal for a set of new delisting policy, process and procedures, including but not limited to:(1) set up an early warning system, which includes utilizing the quantitative models to generate potential default stock list to alert the public;(2) revise the delisting standards, emphasize information transparency and requires earning from operation;(3) establish a process to notify company who fails to meet continued listing requirements; allow for a remedy period to fix the issues, also implement an appeal process for concerned companies to voice opinions;(4) set up a supporting system, including installing a strong self-regulatory committee, reclassifying GEM companies into two layer's markets, providing multiple exit channels, and allowing good GEM company to move up to Main Board;(5) create a mandatory insurance system with funding from the beneficiaries of IPOs to compensate partial losses due to fraudulent practices.The major contributions of this dissertation are: it is the first research to push Stock Exchanges in China to utilize quantitative models to generate list of stock with potential financial and market risks; the first research to propose a warning system to alert individual investors and allow a remedy process for concerned companies; proposed a set of well-defined policy and process, including requiring earning should derive from operation, and auditors' reports require peer reviews. I sincerely hope the suggested proposals to be implemented step by step in the near future.