The party’s over for Chinese small-cap companies in the U.S., as the Nasdaq (NDAQ) has slammed the breaks on numerous new listings while investigating suspicious trading activity in the market segment.
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More than 20 of the recently-listed Chinese small-cap ADRs have doubled on their debut trading days, subsequently reigning in attention from the Nasdaq’s governance team. Although it’s not yet confirmed, many believe that AMTD Digital’s (NYSE: HKD) 320x price surge led to a line being drawn in the sand by the Nasdaq.
In isolation, crackdowns on Chinese small caps might seem like opportunities gone astray for investors. However, the Nasdaq’s decision could result in quite the opposite; here’s why.
The Nasdaq is Protecting Investors
The Nasdaq’s pending action could be in the best interest of investors. The exchange is known for hosting some of the most volatile stocks on the market, such as Moderna (NASDAQ: MRNA), Tesla (NASDAQ: TSLA), and Digital Turbine (NASDAQ: APPS). Thus, it’s needless to say that Nasdaq is pro-liberalized regarding financial markets.
Nevertheless, Nasdaq decided to intervene in this instance, as it felt that most of its market participants had more to lose than gain. According to an overwhelming amount of reports, various Chinese companies have exploited regulatory arbitrage by listing via the Nasdaq. Their prospectuses likely would not have cleared in Hong Kong or on most foreign exchanges (including the New York Stock Exchange).
Furthermore, there are concerns that most of the U.S.-listed Chinese small caps are inaccurately promoted to lure interest from inexperienced investors. According to University of Florida Professor Jay Ritter: “Almost all of these microcap IPOs are ‘story’ stocks, where the promoters try to convince unsophisticated retail investors that this could be the next Moderna or this could be the next Facebook.”
It’s unclear what action the Nasdaq might take once its investigations are complete. More interestingly, the SEC’s stance on the matter remains unclear. Nonetheless, decisive intervention is a sign of robust governance, ensuring that existing stocks provide investors with intrinsic value.
Combating Regulatory Investment Risk
Events such as these teach valuable lessons. For example, doing due diligence on a company’s key metrics is always a good idea instead of dialing in on its growth story. TipRanks’s Risk Factors tool provides a comprehensive overview of companies’ embedded risks, thus equipping investors to challenge the statements made by companies’ management.
Furthermore, factors such as Nasdaq’s crackdown and this year’s general market environment are reminders that geopolitical risk should not be ignored. The Russia-Ukraine war and China’s President Xi’s contrarian policies have played a big hand in 2022’s bear market. Therefore, it’s suggested that investors stay well-informed. TipRanks’ news portal provides help by covering everything from pre-market news to major geopolitical events.
Conclusion: A Positive Outcome for Market Participants
The Nasdaq’s crackdown on Chinese small caps is a sign of the times, as regulators are finally drawing a line in the sand. However, increased reporting quality demands could decrease overall market risk. Thus, this provides a positive outcome for market participants.
