Agency Costs of Socialistic Internal Capital Markets: Empirical Evidence from China
This study provides empirical evidence of 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 increases the noise in performance measures. We also hypothesize that the agency costs of strong firms are positively associated with the amount of resources that are reallocated because of low pay-performance sensitivity and a 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 | Corporate Finance
Financial Performance Analysis
China International Conference in Finance, 2-5 July 2008
City or Country
WANG, Jiwei and Ye, Kangtao.
Agency Costs of Socialistic Internal Capital Markets: Empirical Evidence from China. (2009). China International Conference in Finance, 2-5 July 2008. Research Collection School Of Accountancy.
Available at: http://ink.library.smu.edu.sg/soa_research/248