Relationship-Based Resource Allocations: Evidence from the Use of "Guanxi" during SEOs. (15th August 2018)

• Record Type: Journal Article
• Authors: Brockman, Paul; Firth, Michael; He, Xianjie; Mao, Xinyang; Rui, Oliver
• Is Part Of: Journal of financial and quantitative analysis. Volume 54:Number 3(2019)
• Page Start: 1193
• Page End: 1230
• Publication Date: 2018-08-15
• Subjects: Finance -- Periodicals; Investments -- Mathematics -- Periodicals; 332.05
• DOI: 10.1017/S0022109018000807
• Languages: English
• ISSNs: 0022-1090

Abstract

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.