Abstract: The financial market development in China has been plagued by a notoriously weak legal system. However, China developed an alternative governance system based on the de facto regulatory decentralization. In this system, up to 2000, regional governments were responsible for selecting state-owned enterprises (SOEs) for going public. The effect of this regulatory system has been highly controversial but evidence is terribly scrawny in the literature. This paper provides evidence that regional governments tend to choose better-performing SOEs in the pre-listing stage to go public. This demonstrates that listed companies in China were on average better SOEs before initial public offerings (IPOs) and a substantial portion of stock market investment funds were channeled into potentially productive companies. The firm level data we collected for SOE performances were published when this regulatory regime did not exist, which minimizes data manipulation problem for IPO purposes.
