The Role of Corporate Governance in Related Party Transactions

Abstract

This paper investigates whether there is a negative relationship between related party transactions and firm performance and to examine whether there is a positive moderating effect of corporate governance on the relationship between related party transactions and firm performance. We use Big-N CPA firms or independent boards and supervisors to measure corporate governance mechanisms and suggest that the effect of related party transactions on firm performance is conditional on corporate governance mechanisms. The empirical results provide evidence that corporate governance mechanisms transfer related party transactions from “conflicts of interest” to “efficient transactions”. Thus, we conclude that Big-N CPA firms or independent boards and supervisors can play moderating roles in related party transactions. Our findings contribute to the debate about the competing theoretical perspective and the mixed empirical evidence of related party transactions.