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Related party transactions, agency problem, and exclusive effects

Author

Listed:
  • Kyoung-Soo Yoon

    (Gachon University)

  • Yangsoo Jin

    (Sungshin University)

Abstract

This paper examines the incentives for, and economic impact of related-party transactions (RPTs) by controlling shareholders (CSHs) of corporate groups. We analyze a theory model of RPTs transacted on ‘market terms’ by two affiliate firms in a group, one of which belongs to an upstream and the other to a downstream market. We show that RPTs of this kind, although non-advantageous to the CSH of the group in terms of transfer price, may be abusive in that they serve the interests of the CSH by sacrificing minority shareholders. This is due to the exclusive effects of such RPTs. We show that a CSH has a strong incentive to exclude upstream rivals for his/her own sake rather than the group’s when he/she is allowed to implement such RPTs. The results shed light on regulation of RPTs: distortions of RPTs arise not only from unfair transfer-pricing but also from large transaction volume. This further implies that competition policies regarding the leverage of market power and anti-competitive vertical mergers may be applied to regulate harmful RPTs.

Suggested Citation

  • Kyoung-Soo Yoon & Yangsoo Jin, 2021. "Related party transactions, agency problem, and exclusive effects," European Journal of Law and Economics, Springer, vol. 51(1), pages 1-30, February.
    • Handle: RePEc:kap:ejlwec:v:51:y:2021:i:1:d:10.1007_s10657-020-09680-4
    DOI: 10.1007/s10657-020-09680-4
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    Cited by:

    1. Donghua Chen & Xuerui Wei & Huimin Wang, 2022. "Controlling shareholder’s ownership, control rights and related-party transactions – analysis of regulatory effects based on board characteristics," International Entrepreneurship and Management Journal, Springer, vol. 18(4), pages 1577-1604, December.

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    More about this item

    Keywords

    Related party transactions; Agency problem; Tunneling; Corporate group; Exclusion;
    All these keywords.

    JEL classification:

    • K2 - Law and Economics - - Regulation and Business Law
    • L4 - Industrial Organization - - Antitrust Issues and Policies
    • L5 - Industrial Organization - - Regulation and Industrial Policy

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