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

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.