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

Published online by Cambridge University Press:  15 August 2018

Paul Brockman ,
Michael Firth ,
Xianjie He ,
Xinyang Mao  and
Oliver Rui
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Abstract

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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 3 , June 2019 , pp. 1193 - 1230
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

The authors thank Jay Cai (the referee) and Paul Malatesta (the editor) for helpful comments and suggestions on an earlier version of the paper. Firth thanks the government of the HKSAR (GRF340412) and Lingnan University (DR15A3) for research grants. He acknowledges the financial support from the National Natural Science Foundation of China (Nos. 71472113, 91746117, and 71272008) and the Ministry of Education Project of Key Research Institute of Humanities and Social Sciences at Universities (No. 14JJD630010). Rui acknowledges the financial support of a China Europe International Business School (CEIBS) research grant and the National Natural Science Foundation of China (No. 71372203). Brockman, He, Mao, and Rui acknowledge the profound impact Michael Firth had on them both professionally and personally.

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