Relationship-Based Resource Allocations: Evidence from the Use of “Guanxi” during SEOs

Michael Firth (First Author), Oliver Meng Rui (Participant Author), Xinyang Mao (Participant Author), Paul Brockman (Participant Author), Xianjie He (Participant Author)

Research output: Contribution to journalJournal

8 Citations (Web of Science)

Abstract

We examine the role of relationship-based resource allocations during the approval process of secondary equity offerings (SEOs) in the Chinese capital market. In this unique regulatory setting, SEO-seeking firms must have their applications approved by an Issuance Examination Committee (IEC) of the China Securities Regulatory Commission (CSRC), a hybrid template between government-directed and market-directed models. We identify guanxi-based relationships as cases in which the partner of an intermediary professional firm (e.g., auditing or law) employed by the SEO applicant also serves on secondment as a full-time IEC member. Our results show that these guanxi-based relationships significantly increase the likelihood of SEO approvals, particularly for suspect SEO applicants with abnormal levels of earnings management, related-party transactions, and inter-company loans. More importantly, we find that guanxi-influenced SEO firms have significantly poorer performance in the post-SEO period, which indicates that it results in inefficient resource allocations. In addition, we show that these quid pro quo arrangements benefit IEC-member intermediaries through higher market shares and professional fee revenues. Overall, our evidence suggests that relationship-based resource allocations lead to negative spillover effects that impose social welfare losses.
Original languageEnglish
Pages (from-to)1193-1230
JournalJournal of Financial and Quantitative Analysis
Volume54
Issue number3
DOIs
Publication statusPublished - 2019

Corresponding author email

pab309@lehigh.edu

Project name

中国股票市场股权结构宽度对股价及其同步性的影响研究

Project sponsor

国家自然科学基金

Project No.

71372203

Indexed by

  • ABDC-A*
  • SSCI

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