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

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  • Brockman, Paul
  • Firth, Michael
  • He, Xianjie
  • Mao, Xinyang
  • Rui, Oliver

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.

Suggested Citation

  • Brockman, Paul & Firth, Michael & He, Xianjie & Mao, Xinyang & Rui, Oliver, 2019. "Relationship-Based Resource Allocations: Evidence from the Use of “Guanxi” during SEOs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(3), pages 1193-1230, June.
    • Handle: RePEc:cup:jfinqa:v:54:y:2019:i:03:p:1193-1230_00
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    Cited by:

    1. Chen, Yiping & Shan, Yuan George & Wang, Jimin & Yang, Xinxin & Zhang, Junru, 2024. "Social capital and cost of debt: Evidence from Chinese CEO network centrality," Emerging Markets Review, Elsevier, vol. 60(C).
    2. Liang, Quanxi & Jin, Qi & Lu, Meiting & Shan, Yaowen, 2023. "When school ties meet geography: Education-province bias in mutual fund portfolios," Journal of Banking & Finance, Elsevier, vol. 157(C).
    3. Ren, Haohan & Zhao, Xiaofeng, 2020. "Anticorruption, political connections, and corporate cash policy: Evidence from politician downfalls in China," Emerging Markets Review, Elsevier, vol. 45(C).
    4. Li, WeiWei & Huang, Chia-Hsing, 2024. "Multiple large shareholders and asset-liability maturity mismatches," Finance Research Letters, Elsevier, vol. 65(C).
    5. Liu, Ye & Liu, Jingzhe & Ai, Wei & Wang, Zengxiang & An, Yunbi, 2022. "Agency conflicts in co-regulation: Evidence from IPO application screening in China," International Review of Financial Analysis, Elsevier, vol. 82(C).
    6. Yewei Wu & Bofu Zhang, 2023. "Inquiry Letters and Tax Aggressiveness," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 31(4), pages 37-65, July.
    7. Fuxiu Jiang & Kenneth A Kim, 2020. "Corporate Governance in China: A Survey [The role of boards of directors in corporate governance: a conceptual framework and survey]," Review of Finance, European Finance Association, vol. 24(4), pages 733-772.
    8. Ying Wu & Hong Kim Duong & E. Libin & Hong Yao, 2021. "The ownership effect on corporate investment distortion in the transitional economies: Mitigating or exacerbating?," Review of Quantitative Finance and Accounting, Springer, vol. 57(2), pages 523-555, August.

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