Related Party Transaction and Cost of Debt

Abstract

We investigate whether the firms that use of Related Party Transactions (RPT) is priced by the GCC lenders. RPTs can be used as tunneling mechanism by transferring the resources out of the firm, or can be used as a propping mechanism during the crisis, distress or to meet the targeted performance. We find that credit transactions of the related parties’ increases firms’ cost of debt due to tunneling effects, while increased related party sales based transactions show no effects of firms’ cost of debt. We then investigate three types of ownership’s characterises as channels which effect this association. First, we find the firms that are found by family and, and are leaded by a CEO and chairperson from the same family or tribe both are positively mediating the association between credit transactions of related party and cost of debt. Second, the royal family ownership is negatively mediating the association. Our results are robust to several additional tests and measurement specifications including Propensity Match Scoring, 2SLS, and Sobel Test.

Keywords: Related Party Transaction, Cost of Debt, Gulf Corporation Council

JEL Classification: M41, G32