Agency conflicts in co-regulation: Evidence from IPO application screening in China |
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| Affiliation: | 1. School of Management and Engineering, Nanjing University, Nanjing, Jiangsu 210093, China;2. School of Economics and Management, Tsinghua University, Beijing 100084, China;3. School of Management, Shanghai University of Engineering Science, Shanghai 201620, China;4. Faculty of Business, Athabasca University, Athabasca, Alberta T9S 3A3, Canada;5. Odette School of Business, University of Windsor, Windsor, Ontario N9B 3P4, Canada;1. Excelia Group, Excelia Business School, CERIIM, 102 Rue de Coureilles, 17024 La Rochelle, France;2. University Paris-Saclay, UMI SOURCE, UVSQ, IRD, France and Paris School of Business, PSB, 59 Rue Nationale, 75013 Paris, France;3. Rabat Business School, International University of Rabat, Rabat 11103, Morocco;4. Audencia Business School (AACSB, EQUIS, AMBA), France;1. Department of Management, University of Bologna, Via Capo di Lucca, 34, 40126 Bologna, Italy;2. University of Edinburgh, Business School, 29 Buccleuch Place, Edinburgh, EH8 9JS, United Kingdom;3. University of Chieti-Pescara, Via Luigi Polacchi, 11, Chieti 66100, Italy;1. School of Economics and Management, Beihang University, Beijing 100191, China;2. Beijing Advanced Innovation Center for Big Data and Brain Computing, Beihang University, Beijing 100191, China |
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| Abstract: | We examine agency conflicts in co-regulation using the unique data on audit firms with partners serving on the Stock Issuance Examination and Verification Committee (SIEVC), referred to here as SIEVC-connected audit firms, in China. We find that audit firms' SIEVC connection helps enhance the likelihood of their client companies passing SIEVC's IPO screening. We further demonstrate that to trade off opportunistic gains against reputational and legal costs, SIEVC-connected audit firms tend to work with those IPO applicant companies with overall quality no worse than others. Finally, we show that to seek the greatest possible opportunistic gains and reduce reputational and legal costs, SIEVC-connected audit firms strategically choose to work with the IPO applicant companies with good observable quality and poor unobservable quality. Our findings imply that due to agency conflicts, private entities participating in co-regulation tend to seek their own benefits by helping their connected parties obtain resources. In addition, IPO applicant screening on unobservable quality aggravate agency conflicts and induce more opportunistic behavior on the part of private parties participating in co-regulation. While such opportunistic behavior weakens the fairness of resource allocation, it does not reduce the efficiency of resource allocation. |
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