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Information Risk and Underwriter Switching in SEOs: Evidence from China

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  • Wei Luo
  • Pingui Rao
  • Heng Yue

Abstract

In this paper we examine whether information risk affects underwriter switching in a seasoned equity offering (SEO) process. Building on previous research, we hypothesize that SEO firms and underwriters associate with one another by mutual choice, and firms with a low degree of information risk tend to match up with prestigious underwriters. Using a sample of SEO firms in China and employing accruals quality as a proxy of information risk, we find evidence consistent with our hypothesis: the information risk and the initial public offering (IPO) underwriters’ reputation at the time of the SEO jointly determine the probability that the firms will switch their underwriters. A mismatch between information risk and underwriter reputation increases the probability of an underwriter switching. Furthermore, if the firms decide to switch underwriters, then a lower degree of information risk is associated with a greater likelihood of changing to a more reputable underwriter. We also find that the relationship between information risk and the choice of underwriter reputation primarily exists in non‐state‐controlled companies.

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  • Wei Luo & Pingui Rao & Heng Yue, 2010. "Information Risk and Underwriter Switching in SEOs: Evidence from China," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(7‐8), pages 905-928, July.
    • Handle: RePEc:bla:jbfnac:v:37:y:2010:i:7-8:p:905-928
    DOI: 10.1111/j.1468-5957.2010.02211.x
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    2. Xunan Feng & Kam C. Chan, 2019. "Mutual funds’ selective participation and subsequent performance of seasoned equity offerings," Empirical Economics, Springer, vol. 56(6), pages 1797-1822, June.
    3. Humphery-Jenner, Mark & Karpavicius, Sigitas & Suchard, Jo-Ann, 2018. "Underwriter relationships and shelf offerings," Journal of Corporate Finance, Elsevier, vol. 49(C), pages 283-307.
    4. Luo, Wei & Zhang, Yi & Zhu, Ning, 2011. "Bank ownership and executive perquisites: New evidence from an emerging market," Journal of Corporate Finance, Elsevier, vol. 17(2), pages 352-370, April.

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