The moderating effect of corporate governance on the relationship between related party transactions and firm value

Abstract

Prior studies suggest that most expropriation of a firm's resources is conducted through the related party transactions. Based on the conflict of interest view, related parties opportunistically use their authorities to expropriate firms' resources for their own benefits. The aim of this study is to investigate the moderating effect of corporate governance characteristics on the relationship between RPTs and firm value. This study uses 'divergence' between cash flow and control rights as a new factor that could intensify the negative effect of RPTs. Findings of this study document that board size, CEO duality and divergence between cash flow and control rights can intensify the negative relationship between RPTs and firm value. Findings support the necessity for more scrutiny by regulators, policy makers and standard setters to protect the firm's wealth by introducing stricter regulations for RPTs and improving corporate governance practices.