Building a Junior Stock Exchange: Lessons from China

China established its own junior stock exchange, the National Equities Exchange and Quotations (NEEQ), to solve the financial constraints of small and medium enterprises (SMEs) in 2013. Its short history has witnessed a combination of a hot initial listing market on the one hand and actively delisted firms on the other hand, which is puzzling. We argue in this paper that the hot listing market is the result of governmental subsidies and the removal of entry restrictions. In contrast, the delisting decisions are based on a cost–benefit analysis associated with maintaining the listing status. Though the secondary market is highly illiquid due to intentional institutional restrictions, quoted firms can obtain external finance, which is highly valuable considering the financial repression policy adopted by China. However, because a large percentage of the quoted firms are SMEs, the direct listing costs, despite their absolute value being relatively low, are still significant. In addition, to protect investors, the enforcement actions of NEEQ also impose significant indirect costs on quoted firms.