Social ties and related party transactions

Abstract

This study examines the effect of social ties between the chief executive officer (CEO)/chief financial officer (CFO) and independent board members on related party transactions (RPTs). The presence of CEO/CFO-board social ties can weaken board oversight and result in propping or tunneling activities. However, firms can benefit from a socially connected board’s advice. Using a sample of Chinese listed firms, the results show that CEO/CFO-board social ties are positively associated with abnormal RPTs. This positive association is more pronounced for state-owned enterprises (SOEs), especially locally owned SOEs. Further analyses indicate that firms with socially connected boards engage in RPTs that are detrimental to shareholders. Additionally, the primary results seem to be largely driven by CEOs’ connections. Chinese regulators impose strict regulations on RPTs, directing firms toward transparent transactions. The results of this study, however, indicate that regulatory frameworks should be revised to account for the influence of social ties to protect minority shareholders’ interests.