Does It Pay for Entertaining Your Stakeholders?

Using a unique dataset on business entertainment expenditure (BEE) spent by Chinese public firms from 2004 to 2012, this paper performs the first systematic study on the effects of BEE on firm performance. We find that BEE can improve future firm performance and firm valuation, while it has not been fully anticipated by investors and analysts. We document that BEE can improve the quality of trade credit extended to customers, acquire more trade credit from suppliers, secure more government subsidies, lower collateral requirement of bank borrowings, and reduce litigation incidences. We further find that BEE generates more benefits for firms that face higher transaction costs in dealing with business partners and are politically favored by governments. Finally, we find the beneficial effects of BEE tend to be stronger for firms with better governance. Overall, our results suggest that BEE is value-enhancing, though it may also suffer from agency problems.