Abstract
This study investigates the effect of related party (RP) transactions on market valuation of firms in East Asia. Using a hand-collected sample of 423 listed companies comprising 1195 firm-year observations from Hong Kong, Malaysia, Singapore and Thailand over the period 2008-2010, we find that firms engaged in more RP transactions have significantly lower market valuation, lower performance and lower informativeness of earnings. This finding is robust after controlling for firm specific attributes, corporate governance, ownership structure, earnings quality and many sensitivity tests. Consistent with Kohlbeck and Mayhew (2010), this evidence suggests that investors perceive complex, simple and loan RP transactions differently. These results are consistent with the conflict of interest view that RP transactions reflect potential for wealth expropriation and lead to the market discounting firms that are more engaged in transactions with related parties.
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