Related Party Transactions: Associations with Corporate Governance and Firm Value

60 Pages Posted: 24 Oct 2005

See all articles by Elizabeth A. Gordon

Elizabeth A. Gordon

Temple University - Department of Accounting

Elaine Henry

Stevens Institute of Technology - School of Business

Darius Palia

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics; Columbia University - Law School

Date Written: August 2004

Abstract

Recent corporate scandals have raised considerable concern among regulators and stock market participants about related party transactions (RPTs), prompting Sarbanes-Oxley (SOX) to prohibit personal loans to executives and non-executive board members. In a representative sample of companies for a period that predates SOX, we find RPTs are wide spread and involve equally executives and non-executive board members; additionally, the proportion of related party loans is smaller than other non-loan related party transactions such as purchases or direct services. When we examine the relationship between RPTs and the extant literature's corporate governance mechanisms (such as board characteristics, CEO pay-performance sensitivity, and outside monitors), we generally find weaker corporate governance mechanisms associated with more and higher dollar amounts of RPTs. We also find that industry-adjusted returns are negatively associated with RPTs. On further examination of loans versus other types of RPTs not considered in SOX, we find a negative relationship between industry-adjusted returns and the number and dollar amount of loans to executives and non-executive directors, and a similar relationship between the number of other types of RPTs with non-executive directors. In summary, our results provide support for the view of RPTs as conflicts of interest between managers/board members and their shareholders, in contrast with the view of RPTs as efficient transactions.

Suggested Citation

Gordon, Elizabeth A. and Henry, Elaine and Palia, Darius, Related Party Transactions: Associations with Corporate Governance and Firm Value (August 2004). EFA 2004 Maastricht Meetings Paper No. 4377, AFA 2006 Boston Meetings Paper, Available at SSRN: https://ssrn.com/abstract=558983 or http://dx.doi.org/10.2139/ssrn.558983

Elizabeth A. Gordon (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
2152046422 (Phone)

Elaine Henry

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

Darius Palia

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics ( email )

111 Washington Street
MEC 134
Newark, NJ 07102
United States
973-353-5981 (Phone)
973-353-1233 (Fax)

Columbia University - Law School ( email )

435 W 116th St.
New York, NY 10027
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
3,044
Abstract Views
24,072
Rank
7,615
PlumX Metrics