Get access

Information Risk and Underwriter Switching in SEOs: Evidence from China

Authors

  • Wei Luo,

    1. The first and third authors are from the Guanghua School of Management, Peking University, Beijing. The second author is from the Management School, Jinan University, Guangzhou. They are particularly grateful to Martin Walker (editor), and an anonymous referee for their helpful comments and suggestions. They also thank Guohua Jiang, Donghui Wu, and seminar participants at the SHUFE/CUHK International Conference on Corporate Finance and Governance in Emerging Markets (2009). The authors gratefully acknowledge financial support from National Natural Science of China (NSFC projects: 70902014 and 70702002), and Guanghua School of Management at Peking University.
    Search for more papers by this author
  • Pingui Rao,

    1. The first and third authors are from the Guanghua School of Management, Peking University, Beijing. The second author is from the Management School, Jinan University, Guangzhou. They are particularly grateful to Martin Walker (editor), and an anonymous referee for their helpful comments and suggestions. They also thank Guohua Jiang, Donghui Wu, and seminar participants at the SHUFE/CUHK International Conference on Corporate Finance and Governance in Emerging Markets (2009). The authors gratefully acknowledge financial support from National Natural Science of China (NSFC projects: 70902014 and 70702002), and Guanghua School of Management at Peking University.
    Search for more papers by this author
  • Heng Yue

    Corresponding author
    1. The first and third authors are from the Guanghua School of Management, Peking University, Beijing. The second author is from the Management School, Jinan University, Guangzhou. They are particularly grateful to Martin Walker (editor), and an anonymous referee for their helpful comments and suggestions. They also thank Guohua Jiang, Donghui Wu, and seminar participants at the SHUFE/CUHK International Conference on Corporate Finance and Governance in Emerging Markets (2009). The authors gratefully acknowledge financial support from National Natural Science of China (NSFC projects: 70902014 and 70702002), and Guanghua School of Management at Peking University.
    Search for more papers by this author

Address for correspondence: Pingui Rao, Management School, Jinan University, Guangzhou 510632, China.
e-mail: raopingui@gsm.pku.edu.cn

Abstract

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.

Ancillary