Hostname: page-component-7dd5485656-dk7s8 Total loading time: 0 Render date: 2025-10-31T05:40:06.991Z Has data issue: false hasContentIssue false
  • English
  • Français

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
Get access Rights & Permissions [Opens in a new window]

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.

Information

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 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

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.

References

Aharony, J.; Wang, J.; and Yuan, Y.. “Tunneling as an Incentive for Earnings Management during the IPO Process in China.” Journal of Accounting and Public Policy, 29 (2010), 1–26.Google Scholar
Bena, J., and Ortiz-Molina, H.. “Pyramidal Ownership and the Creation of New Firms.” Journal of Financial Economics, 108 (2013), 798–821.Google Scholar
Bortolotti, B., and Faccio, M.. “Government Control of Privatized Firms.” Review of Financial Studies, 22 (2009), 2907–2939.Google Scholar
Bunkanwanicha, P.; Fan, J. P. H.; and Wiwattanakantang, Y.. “The Value of Marriage to Family Firms.” Journal of Financial and Quantitative Analysis, 28 (2013), 611–636.Google Scholar
Cai, J.; Walkling, R. A.; and Yang, K.. “The Price of Street Friends: Social Networks, Informed Trading, and Shareholder Costs.” Journal of Financial and Quantitative Analysis, 51 (2016), 801–837.Google Scholar
Caprio, L.; Faccio, M.; and McConnell, J. J.. “Sheltering Corporate Assets from Political Extraction.” Journal of Law, Economics, and Organization, 29 (2013), 332–354.Google Scholar
Chaney, P. K.; Faccio, M.; and Parsley, D. C.. “The Quality of Accounting Information in Politically Connected Firms.” Journal of Accounting and Economics, 51 (2011), 58–76.Google Scholar
Chen, C. W., and Yuan, H. Q.. “Earnings Management and Capital Resource Allocation: Evidence from China’s Accounting-Based Regulation of Rights Issues.” Accounting Review, 79 (2004), 645–665.Google Scholar
Chen, D. H.; Li, O. Z.; and Xin, F.. “Industrial Policy and Finance: Evidence from China.” Working Paper, Nanjing University and National University of Singapore (2010).Google Scholar
Chen, X.; Lee, C.-W. J.; and Li, J.. “Government Assisted Earnings Management in China.” Journal of Accounting and Public Policy, 27 (2008), 262–274.Google Scholar
Cheung, Y. L.; Rau, P. R.; and Stouraitis, A.. “Tunneling, Propping, and Expropriation: Evidence from Connected Party Transactions in Hong Kong.” Journal of Financial Economics, 82 (2006), 343–386.Google Scholar
Cohen, D. A., and Zarowin, P.. “Accrual-Based and Real Earnings Management Activities around Seasoned Equity Offerings.” Journal of Accounting and Economics, 50 (2010), 2–19.Google Scholar
Cohen, L.; Frazzini, A.; and Malloy, C.. “The Small World of Investing: Board Connections and Mutual Fund Returns.” Journal of Political Economy, 116 (2008), 951–979.Google Scholar
Cohen, L.; Frazzini, A.; and Malloy, C.. “Sell-Side School Ties.” Journal of Finance, 65 (2010), 1409–1437.Google Scholar
Eckbo, B. E.; Masulis, R.; and Norli, O.. “Security Offerings.” In Handbook of Corporate Finance: Empirical Corporate Finance, Eckbo, B. E., ed. Amsterdam, Netherlands: North Holland (2007), 233–373.Google Scholar
Engelberg, J.; Gao, P.; and Parsons, C. A.. “The Price of a CEO’s Rolodex.” Review of Financial Studies, 26 (2013), 79–114.Google Scholar
Faccio, M.“Politically Connected Firms.” American Economic Review, 96 (2006), 369–386.Google Scholar
Faccio, M.“Differences between Politically Connected and Non-Connected Firms: A Cross Country Analysis.” Financial Management, 39 (2010), 905–927.Google Scholar
Faccio, M., and Parsley, D. C.. “Sudden Deaths: Taking Stock of Geographic Ties.” Journal of Financial and Quantitative Analysis, 44 (2009), 683–718.Google Scholar
Fan, G., and Wang, X.. NERI Index of Marketization of China’s Provinces. Beijing, China: Economic Science Press (2011).Google Scholar
Fracassi, C.“Corporate Finance Policies and Social Networks.” Management Science, 63 (2017), 2420–2438.Google Scholar
Fracassi, C., and Tate, G.. “External Networking and Internal Firm Governance.” Journal of Finance, 67 (2012), 153–194.Google Scholar
Francis, J. R.; Reichelt, K.; and Wang, D.. “The Pricing of National and City-Specific Reputations for Industry Expertise in the U.S. Audit Market.” Accounting Review, 80 (2005), 113–136.Google Scholar
Haw, I.; Qi, D.; Wu, D.; and Wu, W.. “Market Consequences of Earnings Management in Response to Security Regulations in China.” Contemporary Accounting Research, 22 (2005), 95–140.Google Scholar
He, J.; Mao, X.; Rui, O. M.; and Zha, X.. “Business Groups in China.” Journal of Corporate Finance, 22 (2013), 166–192.Google Scholar
Hwang, B., and Kim, S.. “It Pays to Have Friends.” Journal of Financial Economics, 93 (2009), 138–158.Google Scholar
Hwang, B., and Kim, S.. “Social Ties and Earnings Management.” Working Paper, Purdue University (2012).Google Scholar
Ishii, J., and Xuan, Y. H.. “Acquirer-Target Social Ties and Merger Outcomes.” Journal of Financial Economics, 112 (2014), 344–363.Google Scholar
Jian, M., and Wong, T. J.. “Propping through Related Party Transactions.” Review of Accounting Studies, 15 (2010), 70–105.Google Scholar
Jiang, G.; Lee, C. M. C.; and Yue, H.. “Tunneling through Intercorporate Loans: The China Experience.” Journal of Financial Economics, 98 (2010), 1–20.Google Scholar
Johnson, S.; La Porta, R.; Lopez-de-Silanes, F.; and Shleifer, A.. “Tunneling.” American Economic Review, 90 (2000), 22–27.Google Scholar
Khanna, T., and Palepu, K.. “Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups.” Journal of Finance, 55 (2000), 867–891.Google Scholar
Khwaja, A. I., and Mian, A.. “Rent Seeking and Corruption in Financial Markets.” Annual Review of Economics, 3 (2011), 579–600.Google Scholar
Krueger, A.“The Political Economy of the Rent-Seeking Society.” American Economic Review, 64 (1974), 291–303.Google Scholar
Lennox, C., and Li, B.. “The Consequences of Protecting Audit Partners’ Personal Assets from the Threat of Liability.” Journal of Accounting and Economics, 54 (2012), 154–173.Google Scholar
Liu, Q., and Lu, J.. “Corporate Governance and Earnings Management in the Chinese Listed Companies: A Tunneling Perspective.” Journal of Corporate Finance, 13 (2007), 881–906.Google Scholar
Loughran, T., and Ritter, J. R.. “The New Issues Puzzle.” Journal of Finance, 50 (1995), 23–51.Google Scholar
Loughran, T., and Ritter, J. R.. “The Operating Performance of Firms Conducting Seasoned Equity Offerings.” Journal of Finance, 52 (1997), 1823–1850.Google Scholar
Peng, W. Q.; Wei, K. C. J.; and Yang, Z.. “Tunneling or Propping: Evidence from Connected Transactions in China.” Journal of Corporate Finance, 17 (2011), 306–325.Google Scholar
Petersen, M. A.“Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.” Review of Financial Studies, 22 (2009), 435–480.Google Scholar
Piotroski, J. D., and Wong, T. J.. “Institutions and Information Environment of Chinese Listed Firms.” In Capitalizing China, Fan, J. and Morck, R., eds. Chicago, IL: University of Chicago Press (2012), 201–242.Google Scholar
Ritter, J. R.“The Long-Run Performance of Initial Public Offerings.” Journal of Finance, 46 (1991), 3–27.Google Scholar
Ritter, J. R.“Investment Banking and Security Issuance.” In Handbook of the Economics of Finance: Corporate Finance, Constantinides, G., Harris, M., and Stulz, R., eds. Amsterdam, Netherlands: North-Holland, Handbooks in Economics Series (2003), 254–304.Google Scholar
Stigler, G. J.“Public Regulation of the Security Market.” Journal of Business, 37 (1964), 117–142.Google Scholar
Teoh, S. H.; Wong, T. J.; and Rao, G. R.. “Are Accruals during Initial Public Offerings Opportunistic.” Review of Accounting Studies, 3 (1998), 175–208.Google Scholar
Wang, Q.; Wong, T. J.; and Xia, L.. “State Ownership, the Institutional Environment, and Auditor Choice: Evidence from China.” Journal of Accounting and Economics, 46 (2008), 112–134.Google Scholar
Williamson, O. E. Markets and Hierarchies: Analysis and Antitrust Implications. New York, NY: Free Press (1975).Google Scholar
Yang, Z. F.“Do Political Connections Add Value to Audit Firms? Evidence from IPO Audits in China.” Contemporary Accounting Research, 30 (2013), 891–921.Google Scholar
Yu, Q.; Du, B.; and Sun, Q.. “Earnings Management at Rights Issues Thresholds—Evidence from China.” Journal of Banking and Finance, 30 (2006), 3453–3468.Google Scholar