The Relation between Related Party Transactions and Firm Performance: Emphasis on Corporate Governance Mechanisms

Abstract

This paper addresses the two contrasting views on related party transactions (RPTs). First the relationship between RPT and firm performance was investigated. Then, using two mechanisms of corporate governance (Auditing Quality and Independent Board Members), this paper evaluates the effect of these mechanisms on the relationship between RPT and firm performance. To do so, four hypotheses were developed. Two of them address the relationship between RPT (purchase and sale) and firm performance and others address the effect of corporate governance mechanisms on the relationship between RPT (purchase and sale) and firm performance. The sample selection starts with the entire population of Iranian firms listed in Tehran Stock Exchange (TSE) for 2001-2009. Finally the data of 80 firms were obtained. Statistical analyses have been performed using Pooled Data Fixed Effects Regression method. The results show that both RPT purchase and RPT sale are negatively associated with firm performance. The results also show that the corporate governance mechanisms have different effects on the relationship between RPT (purchase and sale) and firm performance. Corporate governance mechanisms have a preventive role in RPT purchase and decrease the negative effects of RPT purchase on firm performance. However, corporate governance mechanisms have a detecting role in RPT sale and help to clear their real negative effect on firm performance.

Keywords: Related Party Transactions (RPTs), Firm Performance, Audit Quality, Independent board members

JEL Classification: G1