The Majority of Stockholders’ Subscription Option in SEO and Escalation of Commitment

Abstract

This paper empirically verifies the impact of majority of shareholders’ SEO subscription option on escalation of commitment under the Agent Theory’s framework based on the data of Chinese listed companies from 2005 to 2008. Results show that listed companies always encouraged to perform the escalation of commitment no matter major stockholders participate the subscription or not. However, compared with the participation of all major shareholders, giving up the SEO subscription option by the major shareholders will increase the possibility of escalation of commitment; furthermore, the most serious escalation will be happened if all of the major shareholders give up the subscription option, and the second serious escalation will be incurred if part of the major shareholders gives up their subscription. These conclusions contribute to comprehend the economic consequences of subscription behavior from the majority of shareholders in SEO, as well as provide a theoretical basis for China Securities Regulatory Commission to supervise and standardize the listed companies’ investment and financing activities, and reducing their investment risks.