Agency conflicts in co-regulation: Evidence from IPO application screening in China

Ye Liu, Jingzhe Liu, Wei Ai, Zengxiang Wang, Yunbi An

Research output: Contribution to journalJournal Articlepeer-review

1 Citation (Scopus)

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.

Original languageEnglish
Article number102131
JournalInternational Review of Financial Analysis
Volume82
DOIs
Publication statusPublished - Jul. 2022

Keywords

  • Agency conflicts
  • Co-regulation
  • Government regulation
  • IPO issuance

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