College of Finance and Banking, National Kaohsiung First University of Science and Technology,College of Management, National Taiwan University
Abstract:
Related party transactions (RPTs) are traditionally deemed as exploitation tools over minority shareholders. Extant literature documents that RPTs are associated with lower firm performance and value. Despite some studies point that RPTs could be engaged for the purpose of reducing transaction costs, little evidence has been provided regarding how cost reduction strategy is substantiated via RPTs. This study investigates if business relatedness moderates the relationships between related party trades and firm performance. We predict that when a firm has more group-affiliated partners that are similar in industry attributes, RPTs are more likely to be driven by transaction cost concern rather than expropriation concern, which leads to higher firm performance. We also hypothesize that the positive association between transaction-cost-driven RPTs and firm performance is especially pronounced in an environment with lower agency conflicts. By analyzing firms listed in Taiwan Stock Exchange (TSE) and traded on the GreTai Securities Market (OTC) from 1997 to 2008, this study provides empirical evidence which is consistent with the predictions. This paper contributes to the literature by providing a better insight into the importance of motivations behind RPTs in determining the consequences on firm performance.
