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.
Agency costs, Managerial compensation, Conglomerate, Business group, Socialistic internal capital markets.
Accounting | Asian Studies | Finance and Financial Management
Journal of International Financial Management and Accounting
Wang, Jiwei and YE, Kangtao.
Managerial Agency Costs of Socialistic Internal Capital Markets: Empirical Evidence from China. (2014). Journal of International Financial Management and Accounting. 25, (1), 1-37. Research Collection School Of Accountancy.
Available at: http://ink.library.smu.edu.sg/soa_research/235