Abstract
The main objective of the current research is to examine the effect of political connections and related party transactions on firm value. Moreover, the moderating role of related party transactions on the relationship between political connections and firm value is investigated. The research sample covers a period of five years from 2014 to 2018, including 33 Egyptian firms listed in the Egyptian Stock Exchange, resulted in 165 firm-year observations. The results show that: first, there is a significant positive relationship between political connections and firm value measured by Tobin’s Q. Second, there is a significant positive relationship between related party transactions related to assets including investments with associates and due from related parties and firm value. Third, related party transactions do not moderate the relationship between political connections and firm value as all interaction variables are insignificant.
Highlights
The well-known Arab revolutions, called the “Arab Spring revolutions” have played a vital role in increasing the people’s awareness in the Middle East
H3 that states “ related party transactions moderate the relationship between political connections and firm value” can be rejected which means RPTs could not be used by politically connected firms to raise Tobin’s Q
The results are inconsistent with the limited studies in the moderating effect of RPTs on the relationship between political connections and firm value that suggest the RPTs used as an expropriating tool (Habib et al, 2017)
Summary
The well-known Arab revolutions, called the “Arab Spring revolutions” have played a vital role in increasing the people’s awareness in the Middle East. Abusive RPTs are used as the device that allows the controlling shareholders to expropriate the non-controlling shareholders by transferring the corporate resources to maximize their wealth through self-deal transactions. This type of transactions will make the transparency of the financial statements is in doubt as this type will increase the earnings management, reduce firm performance, increase the audit fees, increase the abnormal stock returns and all of this will reduce the firm value (Bona-Sánchez et al, 2017; Elkelis, 2017)
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