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Association of related party transactions with sensitivity of investments and external financing

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  • Bhandari, Avishek
  • Kohlbeck, Mark
  • Mayhew, Brian

Abstract

We investigate the association of related party transactions (RPTs) with the sensitivity of firm-level capital allocations. We examine whether opportunistic RPTs are associated with investment and external financing sensitivities to both Tobin's Q and internally generated cash flows. We expect the opportunistic nature of the RPTs dampens the Q sensitivities and increases the cash flow sensitives. We provide evidence that both investment and external debt sensitivities to Q are lower in firms with opportunistic RPTs compared to firms without opportunistic RPTs. Moreover, firms with opportunistic RPTs have higher external equity financing sensitivity to internally generated cash flows. Our results show that opportunistic RPTs are associated with capital allocations. Results are robust to the inclusion of governance attributes. Our study provides further evidence on the opportunistic nature of certain RPTs.

Suggested Citation

  • Bhandari, Avishek & Kohlbeck, Mark & Mayhew, Brian, 2022. "Association of related party transactions with sensitivity of investments and external financing," Journal of Corporate Finance, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:corfin:v:72:y:2022:i:c:s0929119921002686
    DOI: 10.1016/j.jcorpfin.2021.102146
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    More about this item

    Keywords

    Related party transactions; Investment sensitivity; External financing sensitivity;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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