Essays on business relationships: chinese evidence

This thesis analyzes various types of business relationships under different scenarios in three essays.<br><br>In Chapter 2, we focus on a stable business relationship between mutual funds and brokerage firms and investigate the interaction of this relationship with the brokerage firms’ analyst recommendations on the stocks that are held by stably related funds (SRFs). First, we find that analysts issue more optimistic recommendations on stocks held by the brokerage firms’ SRFs than on stocks held by other funds. Second, we provide direct evidence of the effects of stable business relationships on recommendations by showing that analysts increase (decrease) recommendations on their covering stocks when these stocks are added to (dropped from) the portfolios of the brokerage firms’ SRFs. Third, we identify the factors that influence the decision to cultivate the stable business relationship between funds and brokerage firms; these factors are the proportion of commission fee a broker firm receives from a client fund, fund size, brokerage firms’ resources, fund age and fund family size.<br><br>In Chapter 3, we study the effect of the bank-firm relationship within the context of exploring the association between economic policy uncertainty (EPU) and firms’ capital structure choices. EPU could influence firms’ capital structure by influencing firms’ financing needs and external capital supply. Because the banking system plays an important role in providing capitals, especially in emerging markets, we analyze whether the impact of EPU differs for firms with and without existing bank-firm relationships to examine the supply channel (among other tests). We find that leverage ratios are negatively associated with EPU, on average, and this negative effect is more significant for firms that are from regions with higher marketization indexes, are non-state owned, or have no prior bank-firm relationships. We also provide consistent evidence that the negative relationship between capital structures and EPU is sourced from the deterioration of the external financing environment caused by the EPU.<br><br>In Chapter 4, we examine the same fund-broker relationship investigated in Chapter 2 but within the context of Initial Public Offering (IPO) analysis. We take advantage of an exogenous shock to the IPO allocation method in the Chinese market to explore the effects of institutional factors on IPO by comparing IPO underpricing, aftermarket performance, and allocation under pro rata and lottery mechanism. First, we find that the new allocation method is associated with lower underpricing and better aftermarket performance. Second, we hand collect detailed allocation data, and by comparing allocations in the pre- and post-regulation periods, we find that the new allocation method leads to larger allocations for the median investors. The results are consistent with our conjecture that investors have stronger incentives to reveal private information under the new allocation method, which leads to a change in underpricing and aftermarket performance. Third, our analysis of the effects of business relationships between funds and brokerage firms does not show that underwriters favorably allocate new shares to their related clients.