Do Related Party Transactions Affect Family Firm Valuations?

Abstract

We investigate whether family firms are more likely to engage in related party transactions (RPTs) and the impact of RPTs on the previously documented family firm value premium (Anderson and Reeb 2003). While RPTs are strategic in some situations and opportunistic in others (Kohlbeck and Mayhew 2010; Ryngaert and Thomas 2012), family firms are particularly prone to opportunism through RPTs because family members tend to have more power than their ownership stakes predict. We expect RPTs to reduce the family firm premium due the existence of so called type II agency costs from agency conflicts between controlling and minority shareholders and the potential opportunistic behavior represented by RPTs. Based on an extensive hand-collected sample, we find that family firms are more likely to enter into RPTs and the family firm value premium declines when family firms report RPTs. Further, all RPTs are not the same as the declining value premium is only associated with 1) RPTs with directors, officers, and major shareholders, or 2) those considered more opportunistic (tone RPTs).