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Does common institutional ownership constrain related party transactions? Evidence from China

Author

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  • Zhang, Han
  • Li, Minghui
  • Yang, Yujie

Abstract

This study investigates the influence of common institutional ownership (CIO) on the use of related party transactions (RPTs) using a sample of 4410 Chinese A-share listed firms from 2000 to 2021. We find that CIO constrains the use of RPTs. Mechanism tests reveal that the negative association is more prominent for firms with poorer information environments or more concentrated ownership by large shareholders, which is consistent with CIO’s monitoring expertise mechanism. Moreover, the tests indicate that the negative association is more prominent when common institutional investors hold more same-industry or geographically proximate firms, which is consistent with CIO’s scale economy mechanism. Furthermore, heterogeneity analysis suggests that the negative effect of CIO on RPTs is moderated by common institutional investors’ independence, horizon, and stability, as well as by RPTs’ type, abnormality, and direction. Finally, we demonstrate that firms with CIO exhibit higher firm value. Overall, our findings provide a bright side for the ongoing debate regarding the role of CIO and have important implications for regulators and investors in emerging markets.

Suggested Citation

  • Zhang, Han & Li, Minghui & Yang, Yujie, 2024. "Does common institutional ownership constrain related party transactions? Evidence from China," International Review of Economics & Finance, Elsevier, vol. 93(PB), pages 1015-1042.
    • Handle: RePEc:eee:reveco:v:93:y:2024:i:pb:p:1015-1042
    DOI: 10.1016/j.iref.2024.05.039
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    Cited by:

    1. Ying Chen & Lingjie Liu & Libing Fang, 2024. "An Enhanced Credit Risk Evaluation by Incorporating Related Party Transaction in Blockchain Firms of China," Mathematics, MDPI, vol. 12(17), pages 1-23, August.

    More about this item

    Keywords

    Common institutional ownership; Related party transaction; Agency problem; Corporate governance; China;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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