Impact of Outside Blockholders Over Link between Independent Directors and the Normal and Abnormal Related Party Transactions

Abstract

This study examines the effect of independent directors on related sales and related purchases using the normal and abnormal values from 2003 to 2022 of the total sample of 13,789 firms representing 89% of the total Taiwanese listed firms. As a second tier of independent external mechanisms, impact of outside blockholders, on the association between independent directors and related party transactions is examined. This study hypothesizes that the level of related party transactions varies with independent directors. Further, the connection between related party transactions and independent directors varies with the impact of outside blockholders. This study finds that a greater number of independent directors is significantly linked with lesser levels of normal related sales, lower levels of normal related purchases, and higher levels of abnormal related purchases. Thus, the hypotheses are confirmed. This study also finds that the extent of impact of outside blockholders supports a lower level of normal related purchases but higher abnormal related purchases, thus, the hypotheses are supported. Implications include that firms should strengthen their monitoring mechanisms to oversee both normal and abnormal related transactions, emphasizing the importance of regular board reviews. Additionally, the influence of outside blockholders on purchasing decisions underscores the need for companies to engage with these stakeholders to align strategies with shareholder interests.