We are especially grateful to the Co-Editor (Richard Levich) and two anonymous reviewers for their insightful and constructive suggestions. We appreciate helpful comments from Robert Bushman, Kevin Chen, Yuan Ding, Li Jin, Zhengfei Lu, Morong Yang, Hongqi Yuan, and seminar participants at the 2007 International Symposium on Empirical Accounting Research at Xiamen, the 2008 European Accounting Association Congress at Rotterdam, the 2008 China International Conference in Finance at Dalian, the American Accounting Association 2008 Annual Meeting at Anaheim, and 2009 Global Finance Conference at Honolulu. Wang acknowledges the financial support of Singapore Management University (approval number: C206/MSS7A002). Ye thanks the National Natural Science Foundation of China for financial support (approval number: 71072145 and 71132004). All remaining errors and omissions are our own. The corresponding author is Kangtao Ye.
Managerial Agency Costs of Socialistic Internal Capital Markets: Empirical Evidence from China†
Article first published online: 4 JAN 2014
© 2014 John Wiley & Sons Ltd
Journal of International Financial Management & Accounting
Volume 25, Issue 1, pages 1–37, February 2014
How to Cite
Wang, J. and Ye, K. (2014), Managerial Agency Costs of Socialistic Internal Capital Markets: Empirical Evidence from China. Journal of International Financial Management & Accounting, 25: 1–37. doi: 10.1111/jifm.12014
- Issue published online: 4 JAN 2014
- Article first published online: 4 JAN 2014
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.