Managerial Agency Costs of Socialistic Internal Capital Markets: Empirical Evidence from China

Journal of International Financial Management & Accounting, Forthcoming

51 Pages Posted: 14 Oct 2013

See all articles by Jiwei Wang

Jiwei Wang

Singapore Management University - School of Accountancy

Kangtao Ye

Renmin University of China - School of Business

Date Written: 2013

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: Managerial agency costs, Managerial compensation, Conglomerate, Business group, Socialistic internal capital markets

JEL Classification: G15, G32, G34

Suggested Citation

Wang, Jiwei and Ye, Kangtao, Managerial Agency Costs of Socialistic Internal Capital Markets: Empirical Evidence from China (2013). Journal of International Financial Management & Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2339849

Jiwei Wang (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore, 178900
Singapore
(65) 6828 0616 (Phone)
(65) 6828 0600 (Fax)

HOME PAGE: http://www.mysmu.edu/faculty/jwwang/

Kangtao Ye

Renmin University of China - School of Business ( email )

Beijing
China

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