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Related party transactions, business relatedness, and firm performance

Author

Listed:
  • Wang, Hong-Da
  • Cho, Chia-Ching
  • Lin, Chan-Jane

Abstract

This study investigates whether business relatedness, i.e., the degree of related diversification within a business group, moderates the relationship between related party trades and firm performance. We predict that when a firm has more group-affiliated partners that share similar industry attributes or are vertically related, RPTs are more likely to be driven by transaction-cost concerns than by expropriation concerns, which leads to better firm performance. Our empirical results show that while related party trades are negatively associated with firm performance, firms with higher similarity in industry attributes or a higher degree of vertical integration within business groups lead to higher performance via related party trades. From samples of selected industries, we further demonstrate that trading with related parties in the same industry does increase firm performance. This paper contributes to the literature by providing better insight into the importance of motivations behind RPTs in determining their impact on firm performance.

Suggested Citation

  • Wang, Hong-Da & Cho, Chia-Ching & Lin, Chan-Jane, 2019. "Related party transactions, business relatedness, and firm performance," Journal of Business Research, Elsevier, vol. 101(C), pages 411-425.
    • Handle: RePEc:eee:jbrese:v:101:y:2019:i:c:p:411-425
    DOI: 10.1016/j.jbusres.2019.01.066
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    Citations

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    Cited by:

    1. Grzegorz Zimon & Andrea Appolloni & Hossein Tarighi & Seyedmohammadali Shahmohammadi & Ebrahim Daneshpou, 2021. "Earnings Management, Related Party Transactions and Corporate Performance: The Moderating Role of Internal Control," Risks, MDPI, vol. 9(8), pages 1-26, August.
    2. Margarita Robaina & Mara Madaleno, 2020. "The relationship between emissions reduction and financial performance: Are Portuguese companies in a sustainable development path?," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 27(3), pages 1213-1226, May.
    3. Wei‐Kang Wang & Wen‐Min Lu & Qian Long Kweh & Wun‐Ya Siao, 2020. "Related‐party transactions and corporate performance following the adoption of International Financial Reporting Standards in Taiwan," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(3), pages 371-379, April.
    4. Hsiao, Ching-Yuan & Shiu, Yung-Ming, 2021. "Group firms’ access to internal capital markets: The contingent roles of group resources and affiliates’ financial weakness," Economic Modelling, Elsevier, vol. 96(C), pages 135-156.
    5. Kinshuk Saurabh, 2023. "Expropriation mechanisms, corporate governance, and cross-border acquisitions by Indian firms," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 20(4), pages 395-409, December.
    6. Yi-Hsing Liao & Teng-Sheng Sang & Yuan-Tang Tsai, 2022. "Do information sources matter in corporate tax avoidance? The roles of peer effects and director interlocks," Review of Quantitative Finance and Accounting, Springer, vol. 59(1), pages 339-382, July.
    7. Shah, Muhammad Hashim & Xiao, Zuoping & Abdullah, & Quresh, Shakir & Ahmad, Mushtaq, 2020. "Internal pyramid structure, contract enforcement, minority investor protection, and firms’ performance: Evidence from emerging economies," Research in International Business and Finance, Elsevier, vol. 52(C).
    8. Lioara-Veronica Pasc & Camelia-Daniela Hategan, 2023. "Disclosure of Key Audit Matters: European Listed Companies’ Evidence on Related Parties Transactions," IJFS, MDPI, vol. 11(3), pages 1-12, June.
    9. Zheng, Li & Ma, Pengcheng & Hong, Jacky Fok Loi, 2022. "Internal embeddedness of business group affiliates and innovation performance: Evidence from China," Technovation, Elsevier, vol. 116(C).
    10. Aldy Fariz Achsanta & Tastaftiyan Risfandy & Putra Pamungkas & Irwan Trinugroho & Herman Saheruddin, 2021. "Related bank deposits: Good or bad for stability?," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 11(4), pages 735-751, December.
    11. Qi, Songqiao & Sun, Tianmin, 2023. "Directors appointment of non-largest shareholders and related-party transactions," Finance Research Letters, Elsevier, vol. 58(PC).
    12. Lioara-Veronica Pasc & Camelia-Daniela Hațegan, 2020. "Related Parties’ Transactions: A Literature Overview on Auditor’s Risk," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(2), pages 1021-1030, December.
    13. Ruqia Shaikh & Zhiqiang Li & Xiaoli Wang & Muhammad Rizwan Nazir, 2022. "Firm innovation and ultimate control mechanism: Case of emerging market," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(2), pages 440-456, March.

    More about this item

    Keywords

    Related party transactions; Business relatedness; Business groups; Firm performance;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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