The relationship between corporate governance,budgetary slack, and firm performance among Chinese a-share listed companies

Exploring how corporate governance affects firm performance has become an important research topic in China’s evolving transition economy. Although corporate governance theories developed in mature Western markets have been widely applied in various countries, their applicability in emerging economies remains debated due to differences in institutional, legal, and cultural environments. At the same time, budgetary slack, as a manifestation of agency problems, refers to the intentional understatement of budget targets by budget setters and is considered a dysfunctional behavior in budget management. Budgetary slack can lead to efficiency loss, reduced managerial effort, or excessive resource consumption, which may harm firm performance. Therefore, examining the relationships between corporate governance, budgetary slack, and firm performance is essential. This study is grounded in agency theory and resource dependence theory. It constructs an analytical framework for corporate governance, budgetary slack, and firm performance. The study employs panel data from Chinese A-share companies listed on the Shanghai and Shenzhen stock exchanges, covering the period from 2014 to 2023 for empirical testing.Corporate governance is categorized into internal mechanisms (including ownership concentration, state ownership, managerial ownership, board size, board independence, CEO duality, and executive compensation incentives) and external mechanisms (including product market competition, political connections, external audit quality, and media attention). Budgetary slack is a mediating variable investigating its influence on the relationship between internal and external governance mechanisms and firm performance. The empirical results show that internal governance variables such as ownership concentration, board size, board independence, executive compensation incentives, and the proportion of independent directors significantly reduce budgetary slack and improve firm performance. Among external governance factors, political connections, audit quality, and media attention significantly reduce budgetary slack levels and positively affect performance. In addition, there is a significantly negative relationship between budgetary slack and firm performance.Budget slack partially mediates the path through which some governance mechanisms affect performance. These results indicate that the impact of corporate governance on firm performance is reflected in direct effects and produces indirect effects through budgetary processes. This study expands the integrated research on corporate governance, budgetary slack, and firm performance. It reveals the mechanisms through which internal and external governance operate within the Chinese institutional context and provides practical insights for enterprises seeking to optimize budget control and enhance governance efficiency.