Publication Type

Journal Article

Publication Date

2-2014

Abstract

This study provides empirical evidence of managerial agency costs in socialistic internal capital markets. Listed Chinese companies are required to disclose the amount of resources that are reallocated to other firms of the parent company, which provides us with a direct measure of the socialistic subsidization of weak member firms by strong member firms within a business group. We hypothesize that in strong member firms, managerial compensation is less sensitive to firm performance because cross-subsidization makes it difficult for group CEOs to hold the managers in strong firms accountable for their own firms' performance, and also increases the noise in performance measures. We also hypothesize that socialistic cross-subsidization results in an increase in managerial agency costs of strong member firms due to the low pay-performance sensitivity and low incentive to work hard. We document empirical results that are consistent with these two predictions.

Keywords

Agency costs, Managerial compensation, Conglomerate, Business group, Socialistic internal capital markets.

Discipline

Accounting | Asian Studies | Finance and Financial Management

Publication

Journal of International Financial Management and Accounting

Volume

25

Issue

1

First Page

1

Last Page

37

ISSN

0954-1314

Identifier

10.1111/jifm.12014

Publisher

Wiley

Additional URL

http://dx.doi.org/10.1111/jifm.12014

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