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

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

Journal of Financial and Quantitative Analysis, 2019, vol. 54, issue 3, 1193-1230

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.

Date: 2019
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