Corporate Governance and Resource Allocation Efficiency: Evidence from IPO Regulation in China

ABSTRACT As a requisite to issuing initial public offerings (IPOs), Chinese companies must obtain approval from the China Securities Regulatory Commission (CSRC). Using a sample of Chinese firms that applied for IPOs between 2006 and 2011, we examine the influence of corporate governance on the IPO application process and firms' post-IPO performance. We find that firms with more outside directors, smaller boards, and more balanced ownership among large shareholders are more likely to pass the IPO screening. Along similar lines, controlling shareholder ownership is negatively related to the success of IPO screening. Further analyses show that effective corporate governance plays a more important role when firms engage in more complex operations, and it plays a less important role when firms are politically connected. Finally, we find that firms with better corporate governance enjoy better post-IPO performance, indicating that resource allocation is more efficient when the CSRC values firms' corporate governance. JEL Classifications: G02; G14; M14.