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

We examine the role of relationship-based resource allocations during the approval process of seasoned equity offerings (SEOs) in the Chinese capital market. Our results show that guanxi-based relationships significantly increase the likelihood of SEO approvals, particularly for suspect SEO applican...

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Bibliographic Details
Published in:Journal of financial and quantitative analysis 2019-06, Vol.54 (3), p.1193-1230
Main Authors: Brockman, Paul, Firth, Michael, He, Xianjie, Mao, Xinyang, Rui, Oliver
Format: Article
Language:English
Subjects:
Accounting
Applicants
Bankruptcy laws
Capital markets
Committees
Decision making
Earnings
Earnings management
Efficiency
Emerging markets
Initial public offerings
Institutional investments
Loans
Net present value
Quantitative analysis
Social welfare
Transactions
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Summary:We examine the role of relationship-based resource allocations during the approval process of seasoned equity offerings (SEOs) in the Chinese capital market. Our results show that guanxi-based relationships significantly increase the likelihood of SEO approvals, particularly for suspect SEO applicants with abnormal levels of earnings management (EM), related-party transactions (RPTs), and intercompany 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. Overall, our evidence suggests that relationship-based resource allocations lead to negative spillover effects that impose social welfare losses.
ISSN:0022-1090
1756-6916
DOI:10.1017/S0022109018000807