The first deficiency, Fan said, is the lack of hostile takeovers. This term refers to the aggressive acquisition of unhealthy, mismanaged companies when their stock prices fall and then assertively turning around the operations of those failing firms. Hostile takeovers are an indispensable and effective mechanism to force the management of listed companies to take active measures to improve productivity and profitability, Fan said. These mismanaged enterprises are unable to list on the national stock market to raise money, but they might find markets in smaller venues. A third missing component is private placement venture capital investment funds.
Investment funds act as intermediaries between small investors and the capital market.
Small investors may be able to buy and sell stocks, but it is difficult for them to participate in direct investments in the capital market without purchasing individual stocks. This is not only because they lack special expertise but also because the capital at their disposal is limited. Only through intermediaries such as investment funds are small investors able to concentrate capital that could be employed for direct investments. A system of standardized investment funds would invigorate the stock market, Fan said.