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The Role of Governance and Bank Funding in the Determination of Cornerstone Allocations in Chinese Equity Offers

Department of Finance, CUHK Business School, The Chinese University of Hong Kong, Sha Tin, New Territories, Hong Kong, China
J. Risk Financial Manag. 2019, 12(3), 114; https://doi.org/10.3390/jrfm12030114
Received: 10 June 2019 / Revised: 25 June 2019 / Accepted: 27 June 2019 / Published: 2 July 2019
(This article belongs to the Special Issue Financing and Facilitating Entrepreneurship)
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Abstract

This article investigates the causal factors underlying cornerstone investor (CI) participation in initial public offerings in China’s offshore Hong Kong market. Prospectus-based declarations on such allocations suggest that CI undertakings offer strong certification effects. Entrepreneurs planning for IPO thus have a material incentive to court CIs. The present analysis reveals that a firm’s pre-IPO financials and governance attributes strongly correlate with success in this field. Specifically, CI participation is greater in issuers with established long-term loan positions. Firms housing younger CEOs and a greater number of family-connected board officers also generate more CI interest. In contrast, the fraction of independent directors and women on boards exert minimal effect. However, further analysis reveals that greater independent director presence strongly supports CI participation in family-centric entities, but imparts little to no effect on such investment in either state-run or non-family-controlled private issuers. Additionally, an issuer’s political connections galvanize CI participation. Moreover, the present study highlights the importance of family resources (in non-state sponsored entities) and political connections (in state-held firms) in drawing-in CI involvement. Given the spread of CI arrangements to other primary market settings, the present enterprise also offers guidance on anchor investment elsewhere. View Full-Text
Keywords: entrepreneurship; governance; cornerstone agreements; bank loans; political connections; family-run firms; CEO age; independent directors; gender; Chinese issuers entrepreneurship; governance; cornerstone agreements; bank loans; political connections; family-run firms; CEO age; independent directors; gender; Chinese issuers
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited (CC BY 4.0).
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McGuinness, P.B. The Role of Governance and Bank Funding in the Determination of Cornerstone Allocations in Chinese Equity Offers. J. Risk Financial Manag. 2019, 12, 114.

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