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Can business-financial integration mitigate agency problems? Evidence from China's listed firms

Author

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  • Jin, Liyang
  • Yu, Kaidong
  • Zhang, Xuan

Abstract

The separation between business operations and financial management in China's listed firms creates “information islands” within organizations, hindering effective communication between management and shareholders. This fragmentation exacerbates conflicts of interest and intensifies agency problems. Despite the growing research on executive compensation and corporate governance, the role of Business-Financial Integration (BFII) in alleviating agency problems and enhancing pay-performance sensitivity remains underexplored. Using a dataset of A-share listed firms from 2008 to 2022, we investigate the association between executive pay-performance sensitivity and BFII strategies. Additionally, we examine the moderating role of corporate governance in this relationship. Our findings contribute to the literature by demonstrating that BFII can mitigate agency problems, enhance executive pay-performance sensitivity, and interact with corporate governance mechanisms to reinforce these effects. Furthermore, heterogeneity analysis provides additional insights into the varying impacts of BFII across different firm characteristics.

Suggested Citation

  • Jin, Liyang & Yu, Kaidong & Zhang, Xuan, 2025. "Can business-financial integration mitigate agency problems? Evidence from China's listed firms," International Review of Financial Analysis, Elsevier, vol. 103(C).
    • Handle: RePEc:eee:finana:v:103:y:2025:i:c:s1057521925002194
    DOI: 10.1016/j.irfa.2025.104132
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    Keywords

    Business-financial integration; Pay-performance sensitivity; Corporate governance; Agency problems;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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