Related Party Transactions: Their Origins and Wealth Effects
50 Pages Posted: 17 Mar 2007
Date Written: September 20, 2007
Related party transactions are potential mechanisms for insiders to expropriate outside shareholders via self-dealing; however, there are also possible benefits to these arrangements for outside shareholders. This paper investigates the frequency, nature, and valuation consequences of related party transactions for a sample of firms in four industries. The evidence suggests that, on average, related party transactions are not harmful to outside shareholders. However, the average results obscure the fact that while transactions that pre-date a counterparty becoming a related party appear to be innocuous at worst, transactions initiated after a counterparty becomes a related party are associated with reduced shareholder wealth. We also find evidence that firms in which key executive positions are handed down to family members have lower valuations.
Keywords: Related Party Transaction, Ownership Structure, Tunneling, Corporate Governance
JEL Classification: G32
Suggested Citation: Suggested Citation