The Influence of Family Firms on Related Party Transactions and Associated Valuation Implications

53 Pages Posted: 19 Apr 2018

See all articles by Mark J. Kohlbeck

Mark J. Kohlbeck

Florida Atlantic University - School of Accounting

Hye Seung (Grace) Lee

Fordham University - Accounting Area

Brian W. Mayhew

University of Wisconsin - Madison - Department of Accounting and Information Systems

Jesus M. Salas

Lehigh University

Date Written: March 19, 2018

Abstract

We investigate whether family firms are more likely to engage in related party transactions (RPTs) and the impact of RPTs on the previously documented family firm value premium (Anderson and Reeb 2003). While RPTs are strategic in some situations and opportunistic in others (Kohlbeck and Mayhew 2010; Ryngaert and Thomas 2012), family firms are particularly prone to opportunism through RPTs because family members tend to have more power than their ownership stakes predict. We expect RPTs to reduce the family firm premium due the existence of so called type II agency costs from agency conflicts between controlling and minority shareholders and the potential opportunistic behavior represented by RPTs. Based on an extensive hand-collected sample, we find that family firms are more likely to enter into RPTs and the family firm value premium declines when family firms report RPTs. Further, all RPTs are not the same as the declining value premium is only associated with 1) RPTs with directors, officers, and major shareholders, or 2) those considered more opportunistic (tone RPTs).

Keywords: Family Firms, Related Party Transactions, Valuation, Family Firm Premium

JEL Classification: M41

Suggested Citation

Kohlbeck, Mark J. and Lee, Hye Seung (Grace) and Mayhew, Brian W. and Salas, Jesus M., The Influence of Family Firms on Related Party Transactions and Associated Valuation Implications (March 19, 2018). Available at SSRN: https://ssrn.com/abstract=3154565 or http://dx.doi.org/10.2139/ssrn.3154565

Mark J. Kohlbeck (Contact Author)

Florida Atlantic University - School of Accounting ( email )

777 Glades Avenue
KH 119
Boca Raton, FL 33431-0991
United States
561-297-1363 (Phone)

Hye Seung (Grace) Lee

Fordham University - Accounting Area ( email )

Graduate School of Business
113 W. 60th Street
New York, NY 10023
United States

Brian W. Mayhew

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-262-2714 (Phone)
608-263-0477 (Fax)

Jesus M. Salas

Lehigh University ( email )

Bethlehem, PA 18015
United States
610-758-3238 (Phone)

HOME PAGE: http://www3.lehigh.edu/business/faculty/salas.asp

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