Economic Research-Ekonomska Istraživanja
ISSN: (Print) (Online) Journal homepage: https://www.tandfonline.com/loi/rero20
Related Party Transactions and firm value: the role
of governance mechanism
P. C. Abdul Rasheed, Iqbal Thonse Hawaldar & T. Mallikarjunappa
To cite this article: P. C. Abdul Rasheed, Iqbal Thonse Hawaldar & T. Mallikarjunappa (2022):
Related Party Transactions and firm value: the role of governance mechanism, Economic
Research-Ekonomska Istraživanja, DOI: 10.1080/1331677X.2022.2109053
To link to this article: https://doi.org/10.1080/1331677X.2022.2109053
© 2022 The Author(s). Published by Informa
UK Limited, trading as Taylor & Francis
Group.
Published online: 26 Aug 2022.
Submit your article to this journal
View related articles
View Crossmark data
Full Terms & Conditions of access and use can be found at
https://www.tandfonline.com/action/journalInformation?journalCode=rero20
ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA
https://doi.org/10.1080/1331677X.2022.2109053
Related Party Transactions and firm value: the role
of governance mechanism
P. C. Abdul Rasheeda
, Iqbal Thonse Hawaldarb
and T. Mallikarjunappac
a
Department of Commerce, KTM College of Advanced Studies, Malappuram, Kerala, India;
Department of Accounting and Finance, College of Business Administration, Kingdom University,
Riffa, Bahrain; cDepartment of Commerce and International Business, Central University of Kerala,
Kasaragod, Kerala, India
b
ABSTRACT
ARTICLE HISTORY
The research on Related Party Transactions (R.P.T.s) shows that the
impact of R.P.T.s is context dependent and there is no consensus
on the findings of available studies. This study aims to examine
the impact of R.P.T.s on firm value in Indian context and the interaction effect of governance mechanism on the relationship
between R.P.T.s and firm value. A sample of 2,294 firms consisting
of 685 group affiliated firms and 1,609 standalone firms for a
period of 2014–2021 has been selected and panel data regression
method has been applied for testing the hypotheses. The empirical
findings of the study support the transaction efficiency hypothesis
that R.P.T.s in India do not expropriate the interest of minority
shareholders and these transactions enhance efficiency of the firm
by reducing transaction cost, enforcing optimal business contracts
and effectively allocating resources between affiliated firms. The
findings of the study also provide significant contribution to the literature by examining the interaction effect of governance mechanism on the relationship between R.P.T.s and firm value.
Received 8 June 2021
Accepted 29 July 2022
KEYWORDS
Related Party Transactions
(R.P.T.s); transaction
efficiency; conflicts of
interests; arm’s length price;
firm value;
corporate governance
JEL
M48; M41; G30
1. Introduction
A Related Party Transaction (R.P.T.) is a transfer of resources, services, or obligations
between a reporting entity and a related party, regardless of whether a price is
charged (IAS 24). R.P.T.s may violate the principle of arm’s length pricing that the
controlling shareholders may use to divert firm resources for their benefit (Chen
et al., 2011; Elkelish, 2017; Gordon, Henry, & Palia, 2004). The corporate failures like
Satyam fraud, Enron failure, Tyco failure show that R.P.T.s are driven by the conflicts
of interests between majority shareholders and minority shareholders. Another
dimension of R.P.T.s is that they are considered efficient business transactions
because R.P.T.s reduce transaction cost and create an internal market within corporate groups (El-Helaly, 2016). R.P.T.s of firms which have more group affiliated firms
CONTACT Iqbal Thonse Hawaldar
thiqbal34@gmail.com
ß 2022 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.
This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/
licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is
properly cited.
2
P. C. ABDUL RASHEED ET AL.
that share similar industry characteristics are more likely driven by transaction cost
concern than expropriation (Wang et al., 2019). Wang et al. (2020), Hwang and Kim
(2016), Downs et al. (2016) and Yaron et al. (2016) claim that R.P.T.s do not have
any negative impact and these are transactions which reduce the cost and improve
firm performance. R.P.T.s have a negative impact if these transactions are the result
of the conflict of interest between majority and minority shareholders. The effect of
R.P.T.s is that they increase the role of policymakers and auditors to control harmful
R.P.T.s and facilitate R.P.T.s which increase firm’s efficiency (Rasheed et al., 2021).
Wang et al. (2019) and Supatmi et al. (2021) found a negative impact of R.P.T.s on
firm value but Hope and Lu (2019) and Wang et al. (2020) found that R.P.T.s have
an impact on efficiency and, Diab et al. (2019) claim that R.P.T.s are not correlated
with the firm value. The impact of R.P.T.s is not universal and varies between
countries with different system of governance, ownership structure, presence of
business groups, and level of capital market development (Diab et al., 2019; Wang
et al., 2019). The findings of governance practices show that improved governance
reduces expropriation via R.P.T.s (Hope et al., 2019) and weaker governance mechanism has a positive impact on the R.P.T.s (Gordon, Henry & Darius, 2004). The
board characteristics such as, C.E.O. performance, sensitivity and outside monitors
are the major factors which moderate the impact of R.P.T.s on firm value (Gordon,
Henry, & Palia, 2004). This evidence shows that better governance system is necessary for monitoring R.P.T.s, and the policy measures must be capable of controlling harmful R.P.T.s and are able to facilitate R.P.T.s which enhance the efficiency
of operation.
Although many questions and uncertainties about the nature and impact of
R.P.T.s exist, there are a few academic pieces of research to confirm the impact of
different types of R.P.T.s on firm value and the interaction effect of internal governance mechanism on the relationship between R.P.T.s and firm value. The study on
the impact R.P.T.s is relevant especially in India where ownership is concentrated
and business groups rule various sectors of the economy (Rasheed et al., 2019).
Business groups have a tendency to transfer resources from high performing firms to
other firms via R.P.T.s (Jia et al., 2013) and a firm with higher number of affiliated
firms having similar industry characteristics are more associated with transaction efficiency concern than expropriation (Wang et al., 2019). Rasheed and Mallikarjunappa
(2021) prove that R.P.T. in India is positively associated with earnings management
practices. This study analyses the impact of R.P.T.s in Indian context to examine
whether R.P.T.s in India are efficient and increase the market value of the firm or
R.P.T. is a tool used by the insiders to manage firm’s resources for their private benefits. The study addresses the following research objectives.
To analyse the impact of R.P.T.s on firm value in Indian context.
To examine the interaction effect of board structure on the relationship between
R.P.T.s and firm value in Indian context.
The board structure consisting of various characteristics of board of directors is
used as a measure of governance mechanism. The findings of the study add to the
ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA
3
literature by providing significant statistical and theoretical evidence on the impact of
governance mechanism on the relationship between R.P.T.s and firm value. The findings of the study are also a statistical evidence of agency theory. The findings of the
study will be useful to the policymakers to know and analyse the effectiveness of the
R.P.T. regulations and monitoring mechanisms. Regulators can also use the results to
know which type of R.P.T. has to be controlled and which type of R.P.T. has to be
promoted. The findings of the study will be useful for the investors to analyse their
perception about R.P.T.s.
The rest of the article is structured as follows. Section 2 provides a review of the
available studies and hypotheses development. Section 3 explains samples, variables, and
research methodology. Section 4 deals with empirical findings and discussions. Section 5
highlights the major findings, limitations, and implications for further research.
2. Literature review and hypotheses development
The transaction efficiency hypothesis says that R.P.T.s enhance efficiency by reducing
transaction cost, enhance optimal business contracts through deeper knowledge about
related parties. On the contrary conflict of interest hypothesis suggests that R.P.T.s
are used by insiders to manage firm’s resources for their interests and, there are
empirical and theoretical evidence for the two hypotheses. Nekhili and Cherif (2011),
Bona-Sanchez et al. (2017), Habib et al. (2017a) and Supatmi et al. (2021) proved
that controlling shareholders use R.P.T.s to expropriate firms resources, and there is a
negative effect of R.P.T.s on firm value. Alhadab et al. (2020) and Diab et al. (2019)
claim that there is no association between R.P.T.s and firm value. Hope and Lu
(2019) and Wang et al. (2020) find that R.P.T.s facilitate the transfer of resources
between affiliates at lower costs and improve firm market value. The impact of
R.P.T.s varies across countries with different institutional settings, regulatory environment, level of capital market development. Further, the impact of R.P.T.s on firm
value depends on the context in which firm enters into the transactions rather than
being universal (Agnihotri & Bhattacharya, 2019; Alhadab et al., 2020). While considering the factors which determine the nature of R.P.T.s suggested by the previous studies,
R.P.T.s in India are likely to be driven by transaction cost concern and therefore, we
develop the following research hypothesis.
H1: R.P.T.s increase firm value
The dual effect of R.P.T.s gives special attention to regulators for framing policies
to control harmful R.P.T.s and to encourage efficient transfer of resources between
related parties. Corporate governance mechanisms especially the board structure has
an impact on R.P.T.s (Hope et al., 2019; Yeh et al., 2012). Chien and Hsu (2010)
proved that board independence has a positive interaction effect on the impact of
R.P.T.s on firms’ performance. Hu et al. (2012) proved that that ownership structure,
outside directors’ compensation, and dual role of C.E.O. increase the volume of cross
border R.P.T.s but the presence of more indepenednt directors on the board reduces
the volume of cross border R.P.T.s. Daie and Hasnan (2012) found that the presence
of more independent directors on the board can mitigate the adverse effect of R.P.T.s
and Chauhan et al. (2016) suggests that better governance practices can control self-
4
P. C. ABDUL RASHEED ET AL.
dealing transactions which are harmful to firm performance. Based on this research
evidence we develop the following research hypothesis.
H2: Board structure interact on the impact of R.P.T.s on firm value.
2.1. Board structure
There is a chance for conflict of interests and disharmony between the majority
shareholders and minority shareholders if the managers are motivated by self-interest
(Jian & Wong, 2003). The Board structure has a significant role in controlling the
abusive R.P.T.s (Chauhan et al., 2016; Chien & Hsu, 2010; Elhelaly, 2014; Hu et al.,
2012). In this study board structure means the following characteristics of the board.
2.1.1. Board size
The complexity associated with the decision-making process, the effectiveness of decisions and strategies are largely influenced by the board size (Kumar & Singh, 2013).
There are two contrasting views associated with board size and firm performance.
One view is that a board with a higher number of directors is effective to boost the
performance of the firm. A large board size allows firms to nominate diverse people
into the board which increase the effectiveness in the decision-making process (Klein,
2002). The second view is that a large board is not effective to enhance the performance of the firm because it increases the complexity of communication and coordination of activities (Cheng, 2008; Kumar & Singh, 2013).
2.1.2. Board independence
The ability, specialised skill, and knowledge of the independent directors and also
their independent attitude of each director might lead to the effectiveness of the
board. According to Mishra and Kapil (2018), the ability of evaluation and the monitoring power of the independent directors helps to improve firm performance but
Hamdan and Al Mubarak (2017) found that internal managers are more effective and
trusted than outside managers. Kohlbeck and Mayhew (2004), Gordon, Henry, and
Darius (2004) and Gallery et al. (2008) found that the internal monitoring mechanism, and board independence, constrain the size of R.P.T.s. Gordon, Henry, and
Darius (2004) found that the presence of more independent directors on the board is
negatively correlated with the size of R.P.T.s.
2.1.3. Number of executive directors on the board
Wang and Oliver (2009) found that the presence of a greater number of executive
directors on the board reduces the variability of risks, and the presence of large number of independent directors lead to effective board performance. The executive directors engage in the daily operation of the firm and, therefore they have a major role
in R.P.T. decisions. Proper resource allocation is possible if the executive directors do
not have any other interests other than firm interests.
ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA
5
2.1.4. C.E.O.-duality
The dual role of C.E.O. reduces the effectiveness of governance system and monitoring mechanism due to the concentration of power inside the company (Fama &
Jensen, 1983). A good governance structure and monitoring mechanism help to constrain management’s opportunistic behavior and firms with different persons occupying the posts of C.E.O. and chairman are less likely to engage manipulation through
R.P.T.s (Lo et al., 2010).
2.1.5. Founder director
The involvement of founders in the board is always important. If the founder directors give preference to their interest than group interest, they may pursue the board
to take decisions which are favourable to controlling owners. The empirical evidence
of Lo et al. (2010) prove that the presence of higher number of parent directors leads
to the opportunistic behaviour of the controlling shareholders. The second view is
that founder directors may have a strong intention for a long survival and existence
of the firm than other directors.
It is relevant and informative to know the impact of board structure on the relationship between R.P.T.s and firm value. R.P.T.s may negatively affect firm value if
the board structure is weak and it may have a positive impact if the board
is effective.
3. Research methodology
3.1. Sample of the study
We have selected all the companies, excluding banking and financial companies,
which are listed in the Bombay Stock Exchange (B.S.E.) as on 31 March 2021, and
their financial data is available in the Prowess database. There were 3,662 non-financial companies listed on the B.S.E. on the said date, of these 1,632 companies’ data
are not available in the Prowess data base. The final sample is 2,294 companies comprises of 685 group affiliated firms and 1609 standalone firms. The study covers eight
years data from 1 April 2014 to 31 March 2021.
3.2. Data collection
The objectives of the study have been achieved using the data of 2,294 firms. The
data for empirical analysis have been collected from the Prowess database.
3.3. Variables of the study
The following are the interesting and the controlled variables used for empirical analysis.
Related Party Sales (R.P.S.) – Represents income from the sale of goods to related
parties scaled by total assets.
6
P. C. ABDUL RASHEED ET AL.
Related Party Services (R.P.S.S.) – Income from services to related parties scaled
by total assets.
Other revenue receipts from related parties (R.R.P.) – All other revenue receipts
such as rent income, interest income … , etc. scaled by total assets.
Related Party Purchases (R.P.P.) – The amount paid for the purchase of goods
and services from related parties scaled by total assets.
Revenue expenses paid to related parties (R.P.R.E.) –All other types of revenue
payments to related parties such as salaries, wages, rent … , etc. scaled by
total assets.
Capital Receipts from Related Parties (C.R.R.P.) – Total amount received from
related parties for the sale of assets scaled by total assets.
Capital Payments to Related Parties (C.P.R.P.) – Total amount paid to related parties for the purchase of capital assets and investments scaled by total assets.
Related Party Borrowings (R.P.B.) – Loans and deposits received from related parties scaled by total assets.
Loans and Advances to Related Parties (L.A.R.P) – Total loans and other financial
assistance to related parties scaled by total assets.
R.P.T.s – Sum of different R.P.T.s scaled by total assets.
Tobin’s Q ratio
Tobin’s Q is the ratio of the market value to replacement cost. Liew et al. (2015),
Bona-Sanchez et al. (2017), Wong et al. (2015), Lin and Liu, (2010) and Nekhili and
Cherif (2011) used Tobin’s Q ratio to measure firm market value. In India Mishra
and Kapil (2018) and Kumar and Singh (2013) used Tobin’s Q ratio as a measure
firms’ market value.
Tobin’s Q ¼
Market Value of Debt þ Market Value of Equity
Total Assets
Board Size (B.S.) – Total number of directors on the board
Board Independence (B.I.) – Ratio of independent directors to total directors
Executive directors (B.E.) – Ratio of executive directors to total directors.
Promoter Directors (P.D.) – Ratio of promoter directors to total directors
C.E.O. Duality (Duality) – Coded as 1, if C.E.O. is the chairman of the board.
Size of the Firm (Size) – log value of the total assets
Leverage of the firm (Lev) – Ratio of debt to total assets
3.4. Econometric models developed for the study
Our data consist of 2,294 firms for eight years and we have 18,352 firm-year data
which forms the panel data. We develop three panel regression models and all these
models are also applied in the sub-samples business groups and standalone firms.
ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA
7
Model 1
Tobin’s Q Ratio ¼ a0 þ a1 RPTsi, t þ a2 PHi, t þ a3 IHi, t þ a4 Sizei, t þ a5 LEV i, t þ eit
Model 2
Tobin’s Q Ratio ¼ a0 þ a1 RPSi, t þ a2 RPSSi, t þ a3 RRPi, t þ a4 RPPi, t þ a5 RPREi, t
þ a6 CRRPi, t þ a7 CPRP þ a8 RPBi, t þ a9 LARPi, t þ a10 PHi, t
þ a11 IHi, t þ a12 Sizei, t þ a13 LEV i, t þ eit
The variables proportion of promoters’ holdings (P.H.), proportion of institutional
holdings (I.H.), Size, and L.E.V. are taken as the controlled variables and the selection
of these variables are based on the findings of previous studies including Mishra and
Kapil (2018) and Kumar and Singh (2013); the subscript i represent firm and t represent the year.
Model 3
QRatio ¼ a0 þ a1 BSRPT i, t þ þa2 BIRPTi, t þ a3 BERPT i, t þ a4 PDRPTsi, t
þ a5 DualityRPTsi, t þ a6 BSi, t þ a7 BIi, t þ a8 BEi, t þ a9 PDi, t þ a10 Dualityi, t
þ a11 PHi, t þ a12 IHi, t þ a13 Sizei, t þ a14 LEV i, t þ eit
Model 1 is used to study the impact of R.P.T.s on firm value, Model-2 is used to
explore the impact of various types of R.P.T.s on firm value and Model 3 is used to
study the interaction effect of board structure on the relationship between R.P.T.s
and firm value. All these models are also applied in the sub-samples group affiliated
firms and standalone firms.
4. Empirical findings and discussion
Table 1 presents the descriptive statistics of the value of R.P.T.s scaled by the total
assets and the variable used for measuring firms’ market value. The average total
R.P.T.s in the full sample is 0.1654 with a standard deviation of 0.316, and the average R.P.T.s in business groups is 0.201 with a standard deviation of 0.149. The average Tobin’s Q ratio in the full sample is 1.506 which is less than the average of
business group. By considering a different types of R.P.T.s Table 1 proves that R.P.S.
is large compared with other types of R.P.T.s and the volume of R.P.T.s is higher in
business group than standalone firms. C.R.R. is small in all the samples the average
C.R.R. is 0.003 in the full sample, 0.005 in business groups and 0.002 in standalone
firms. The descriptive statistics of R.P.T.s prove that R.P.T.s in India is material
because the average size of R.P.T.s constitute a significant portion of firm total assets
and while considering types of R.P.T.s the average of R.P.S., R.P.P. and R.P.R.E. are
greater than 0.02 and therefore, these characteristics increases the relevance to study
the impact of R.P.T.s on firm value.
8
P. C. ABDUL RASHEED ET AL.
Table 1. Descriptive statistics of RPTs.
Full sample
RPT
RPS
RPSS
RRP
RPP
RPRE
CRR
CPRP
RPB
LAGV
TQ
Total no. of observations
Mean
0.165
0.042
0.014
0.012
0.033
0.024
0.003
0.008
0.018
0.013
1.506
St.
Median Deviation (SD)
0.053
0.316
0.000
0.137
0.000
0.069
0.000
0.094
0.000
0.115
0.010
0.055
0.000
0.027
0.000
0.039
0.000
0.079
0.000
0.056
0.866
1.795
18,352
Business groups
Standalone firms
St.
Mean Median Deviation
0.201 0.079
0.349
0.055 0.000
0.163
0.019 0.000
0.082
0.019 0.000
0.110
0.035 0.000
0.113
0.025 0.019
0.053
0.005 0.000
0.035
0.011 0.000
0.046
0.016 0.000
0.073
0.016 0.000
0.062
1.521 0.895
1.729
5,480
St.
Mean Median Deviation
0.149 0.044
0.300
0.036 0.000
0.124
0.011 0.000
0.062
0.009 0.000
0.080
0.032 0.000
0.116
0.023 0.009
0.056
0.002 0.000
0.023
0.006 0.000
0.035
0.019 0.000
0.081
0.011 0.000
0.053
1.499 0.855
1.822
12,872
Note: Values in the table are ratio between RPTs and total assets.
Source: Authors’ computation.
Table 2 presents the correlation statistics. There are positive and negative correlations
between the variables but there is no strong correlation between any of the variables.
4.1. R.P.T.s and firm market value
Table 3 reports empirical evidence of the impact of R.P.T.s on firm value. Panel fixed
effect model has been used for estimating regression coefficient and testing the
hypotheses. The results reported in Table 3 show that R.P.T.s positively impact firm
market value. The coefficients of R.P.T.s are 0.141 in the full sample, 0.232 in business groups and 0.118 in standalone firms; and all the coefficients are statistically significant. This result is identical with Hope and Lu (2019), Wang et al. (2019) and Lo
and Wong (2016), who report that R.P.T.s improve firm market value. The positive
impact of R.P.T.s on firm market value proves that R.P.T.s reduce the transaction
costs including searching cost, information cost and legal cost which increase firm’s
operational efficiency and improve market value. The positive impact of R.P.T.s on
firm value also support the argument that shareholders and other stakeholders perceive that. R.P.T.s are not harmful and it is used to allocate resources between affiliated firms. The values of the controlled variables are in the predicted directions. The
value of L.E.V. is positive and significant and firm size is negative and significant and
these results are consistent with Mishra and Kapil (2018) and Kumar and Singh
(2013). The coefficients of I.H. and P.H. are positive but P.H. is significant only in
business group.
The empirical evidence of Model-2 presented in Table 3 shows that the coefficients
of R.P.S., R.P.S.S. R.P.P. and L.A.R.P. are positive and significant, which support the
argument that R.P.T.s increase firm value. The coefficients of R.R.P. and C.R.R.P. are
negative but these are not statistically significant. The coefficients of R.P.R.E. are
1.169 in the full sample, 1.807 in group and 0.946 in standalone firms and all these
values are statistically significant. This result indicates that expenses paid for related
parties, especially remuneration to the related parties, rent, wages … etc. is not a way
of expropriation rather it increases efficiency and value of the firm. The coefficients
Table 2. Correlation statistics.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
1.00
–0.09
0.15
0.06
–0.01
0.09
0.01
0.11
0.08
0.03
0.04
0.06
0.09
0.03
0.03
0.04
0.02
0.00
0.21
1.00
0.43
0.02
–0.08
–0.03
0.22
0.04
0.00
0.11
0.01
0.01
0.04
0.02
0.10
–0.07
0.05
–0.11
0.51
1.00
–0.01
–0.10
0.02
0.16
0.05
0.05
0.06
0.04
0.03
0.04
0.00
0.04
–0.07
0.00
–0.08
0.50
1.00
–0.20
0.05
0.00
–0.03
–0.03
0.02
–0.01
–0.05
–0.03
0.01
0.01
–0.02
0.02
–0.03
0.05
1.00
0.08
–0.05
–0.06
–0.04
–0.06
–0.05
–0.01
–0.04
–0.01
–0.02
–0.01
–0.02
0.02
–0.04
1.00
–0.01
0.00
0.00
–0.01
0.00
0.00
–0.04
0.01
0.00
0.01
0.03
0.02
0.05
1.00
0.03
–0.01
0.10
0.01
–0.02
0.06
0.01
0.04
–0.03
0.02
–0.06
0.19
1.00
0.72
0.25
0.62
0.61
0.37
0.17
0.20
0.30
0.26
0.01
0.04
1.00
–0.04
0.50
0.36
0.08
0.00
0.00
0.00
0.00
0.00
0.03
1.00
0.03
–0.02
0.17
0.02
0.06
0.00
0.05
–0.08
0.08
1.00
0.19
0.08
0.02
0.01
0.01
0.05
–0.02
0.01
1.00
0.17
0.01
0.01
0.02
0.03
–0.01
0.04
1.00
0.02
0.03
0.10
0.03
–0.03
0.00
1.00
0.31
0.07
0.08
–0.02
0.03
1.00
0.02
0.12
–0.05
0.10
1.00
0.08
0.23
–0.12
Source: Authors’ computation.
17
1.00
0.03
0.06
18
19
1.00
–0.07
1.00
ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA
PH (1)
IH (2)
BS (3)
BI (4)
BE (5)
PD (6)
DUALITY (7)
RPTS (8)
RPS (9)
RPSS (10)
RRP (11)
RPP (12)
RPRE (13)
CRRP (14)
CPRP (15)
RPB (16)
LARP (17)
LEV (18)
SIZE (19)
9
10
P. C. ABDUL RASHEED ET AL.
Table 3. RPTs and firm market value.
Full sample
C
RPT
RPS
RPSS
RRP
RPP
RPRE
CRRP
CPRP
RPB
LARP
Model-1
6.013
(36.787)
0.141
(3.581)
Model-2
5.924
(36.071)
0.061
0.551
0.265
1.231
–0.220
–1.743
0.006
0.055
1.169
(6.357)
–0.496
(-1.601)
0.718
(3.228)
0.288
(2.376)
0.250
(1.483)
0.128
(1.597)
1.058
(5.346)
–0.630
(–29.378)
0.596
(10.964)
18352
Yes
0.755
0.720
21.46
Business groups
Model-1
5.960
(16.040)
0.232
(3.650)
Model-2
5.800
(15.518)
0.095
0.547
0.446
1.412
–0.213
–1.343
0.163
0.769
1.807
(6.296)
–0.257
(–0.602)
0.808
(2.660)
0.254
(1.278)
0.362
(1.414)
0.662
(4.233)
0.962
(3.505)
–0.568
(–13.770)
0.530
(5.932)
5480
Yes
0.805
0.777
28.124
Standalone firms
Model-1
5.786
32.295
0.118
(2.405)
0.141
0.681
0.062
(1.762)
(4.343)
(0.660)
IH
1.073
1.017
1.152
(5.416)
(3.699)
(4.321)
–0.585
–0.649
SIZE
–0.641
(–30.019)
(–14.260)
(–25.802)
LEV
0.619
0.561
0.660
(11.521)
(6.340)
(9.933)
No. of observation
18352
5480
12872
Industry fixed effect
Yes
Yes
Yes
R-squared
0.754
0.803
0.737
0.719
0.775
0.699
Adjusted R-squared (Adj. R2)
F statistic
21.44
28.16
19.517
Notes: significant at the 1% level, significant at the 5% level, significant at the 10% level.
Source: Authors’ computation.
PH
Model-2
5.713
31.718
0.090
(0.635)
0.219
(0.780)
–0.250
(–1.367)
–0.019
(–0.141)
0.946
(4.074)
–0.646
(–1.535)
0.658
(2.181)
0.304
(2.018)
0.224
(1.036)
0.050
(0.533)
1.148
(4.308)
0.639
(–25.299)
0.640
(9.509)
12872
Yes
0.738
0.700
19.469
of C.P.R.P are 0.718 in the full sample, 0.808 in business groups and 0.658 in standalone firms and all these coefficients are statistically significant. The positive impact of
C.P.R.P. on firm value proves that purchase of capital assets from related parties is on
arm’s length basis more than that it reduces the cost of acquisition of assets and
increase firm value and the coefficients of C.P.R.P. show that the relationship is very
strong in business group. The coefficient of R.P.B. is 0.288 in the full sample and 0.304
in standalone firms both are statistically significant, but the coefficient is not significant
in business group. The positive impact of R.P.B. on firm value prove that R.P.B. helps
to fulfil firms financing requirements, reduces the cost of acquisition of finance from
related parties and improve firm market value. The results also prove that R.P.B. is not
a way used by majority shareholders to divert firm’s wealth for their interests. The
coefficients of L.A.R.P. are positive but not significant which indicate that loans and
advances to related parties do not cause expropriation of the wealth of the firm.
The statistical significance of the controlled variables in model-2 is consistent with
model-1. P.H., I.H. and L.E.V. are positively associated with firm value but size has a
ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA
11
negative impact on firm value. P.H. is statistically significant only in the full sample
and business groups but I.H. is significant in all the sample sets.
4.2. Interaction effect of board structure on the relationship between R.P.T.s
and firm market value
Table 4 presents the impact of board structure on the relationship between R.P.T.s
and firm value. B.I. has a positive interaction effect on the relationship between
R.P.T.s and firm value, the interaction coefficient is 0.285 and statistically significant. The interaction effect of B.I. is very strong in business group than the full
sample, the coefficient is 0.627 which is statistically significant at the 5% level. The
positive interaction of B.I. prove that independent directors support decisions
related to the firms’ transactions with its related parties which are efficient than
normal business transactions and improve firm’s market value. The interaction
effect of other variables is not statistically significant but the interaction terms
BSRPT and PDRPT are negative and the interaction terms BERPT and
DualityRPT are positive.
Table 4. Interaction effect of board structure on the relationship between RPTs and firm value.
C
BSRPTs
BIRPTs
BERPTs
PDRPTs
DUALITYRPTs
BS
BI
BE
PD
DUALITY
PH
IH
SIZE
LEV
No. of observation
Industry fixed effect
R-squared
Adj. R2
F statistic
Source: Authors’ computation.
Full sample
6.229
(36.665)
–0.010
(–1.063)
0.284
(2.019)
0.084
(0.477)
–0.032
(–0.178)
0.270
(1.834)
0.012
(1.991)
–0.521
(–6.728)
–0.091
(–0.954)
0.008
(0.111)
0.040
(0.738)
0.206
(2.532)
1.141
(5.725)
–0.649
(–30.074)
0.628
(11.674)
18352.000
Yes
0.756
0.721
21.442
Business groups
6.244
(16.439)
–0.008
(–0.480)
0.627
(2.483)
–0.078
(–0.230)
–0.341
(–1.238)
0.160
(0.665)
–0.001
(–0.148)
–0.486
(–3.390)
0.079
(0.409)
–0.040
(–0.289)
0.153
(1.964)
0.726
(4.572)
1.072
(3.883)
–0.593
(–14.281)
0.563
(6.354)
5480.000
Yes
0.805
0.776
27.886
Standalone firm
5.979
(31.753)
–0.010
(–0.891)
0.125
(0.732)
0.175
(0.831)
0.136
(0.601)
0.315
(1.732)
0.019
(2.526)
–0.526
(–5.690)
–0.137
(–1.235)
0.019
(0.212)
–0.043
(–0.620)
0.120
(1.254)
1.236
(4.596)
–0.658
(–25.886)
0.672
(10.105)
12872.000
Yes
0.739
0.701
19.494
12
P. C. ABDUL RASHEED ET AL.
The Durbin Watson statistics prove that there is no problem of autocorrelation in
the analysis and there is a good model fit because R-square varies from 0.739 to
0.805 in the sample sets.
We report the interaction of board structure on the relationship between different
types of R.P.T.s and firm value in Tables 5 to 7. The results of the empirical analysis
using the full sample show that B.S. has a positive interaction on the relationship
between C.R.R.P. and firm value, the value of the interaction term is 0.194 which is
statistically significant. This result proves that a board with diversified directors are in
favour of asset transfer between related parties and it reduces the transaction costs
and improves firm market value. The interaction of B.S. on the relationship between
R.P.B. and firm value is 0.084 which is statistically significant. It proves that a board
with higher number of directors stand against borrowings from related parties due to
the chance of expropriation. B.I. has a positive interaction on the relationship
between R.P.S.S. and firm value the coefficient of the interaction term is 2.422 in the
full sample and 4.861 in business group both are significant at the 1% level, but this
relationship is statistically not significant in standalone firms. The positive interaction
effect of B.I. shows that independent directors support the decisions regarding services to related parties which increase firm’s operating income and market value. The
coefficients of the interaction term BIRPRE is 2.783 in the full sample and 9.062 in
business group and both are statistically significant but this interaction effect statistically is not significant in standalone firm. The statistically significant impact of the
term BIRPRE indicates that the independent directors support the decisions for
accepting various services from related parties and independent directors consider
that R.P.R.E. does not cause expropriation but it improves firm market value by
reducing the operational cost. B.I. has a negative interaction effect on the relationship
between C.R.R.P. and firm value, the value of the interaction term is 3.376 in the
full sample and 3.875 in standalone firms, but this interaction effect is not significant in business group. This negative interaction of B.I. indicates that due to the
chance of expropriations independent directors’ stand against the decision connected
with the sales or transfer of firm’s asset to its related parties. When a firm sells its
capital assets to related parties’ chance for breach of the arm’s length principle is very
high and therefore independent directors do not support those decisions. The interaction of B.I. is positive on the relationship between R.P.B. and firm value the coefficients are 1.142 in the full sample and 2.474 in business group and both are
statistically significant but this interaction effect is not statistically significant, in
standalone firms. It indicates that independent directors encourage the firm for
accepting loans and advances from its related parties due to the perception that borrowings from affiliates and connected parties reduce the cost of financing. B.E. has a
positive interaction on the association between R.P.P. and firm value and the association is very strong in standalone firms, but this relationship statistically does not
exist in business group. The coefficients of the interaction term are 1.102 in the full
sample and 1.252 in standalone firms and both the values are statistically significant
at the 1% level. The positive interaction of B.E. on the association between R.P.P. and
firm value indicates that executive directors encourage the board to purchase required
raw materials from its related parties. Purchase of raw materials from related parties
Table 5. Interaction effect of board characteristics on the relationship between various types of RPTs and firm value (full sample).
C
BSRPTs
BIRPTs
BERPTs
PDRPTs
DUALITYRPTs
BS
BI
PD
DUALITY
PH
IH
SIZE
LEV
No. of observation
Industry fixed effect
R-squared
Adj. R2
F statistic
RPTs¼
RPSS
6.234
(36.717)
–0.068
(–1.372)
2.422
(2.974)
–1.069
(–1.157)
–2.488
(–2.872)
0.808
(2.040)
0.012
(1.979)
–0.499
(–6.691)
–0.058
(–0.628)
0.031
(0.445)
0.066
(1.400)
0.219
(2.702)
1.141
(5.723)
–0.652
(–30.263)
0.633
(11.767)
18352
Yes
0.756
0.721
21.45
RPTs¼
RRP
6.242
(36.748)
0.020
(0.817)
–0.256
(–0.505)
–1.044
(–1.393)
0.843
(1.203)
0.099
(0.187)
0.010
(1.790)
–0.473
(–6.374)
–0.066
(–0.721)
–0.003
(–0.043)
0.086
(1.836)
0.217
(2.675)
1.134
(5.690)
–0.651
(–30.241)
0.628
(11.684)
18352
Yes
0.756
0.720
21
RPTs¼
RPP
6.243
(36.758)
–0.023
(–0.838)
–0.321
(–0.803)
1.102
(2.319)
0.455
(0.989)
0.223
(0.502)
0.011
(1.926)
–0.464
(–6.157)
–0.111
(–1.205)
–0.013
(–0.175)
0.084
(1.759)
0.215
(2.648)
1.152
(5.780)
–0.652
(–30.258)
0.630
(11.718)
18352
Yes
0.756
0.721
21.34
RPTs¼
RPRE
6.144
(36.083)
0.018
(0.353)
2.783
(3.761)
–1.278
(–1.832)
–0.287
(–0.323)
–0.390
(–0.639)
0.009
(1.551)
–0.546
(–7.163)
–0.062
(–0.673)
0.000
(0.005)
0.098
(1.969)
0.205
(2.525)
1.130
(5.676)
–0.635
(–29.333)
0.617
(11.486)
18352
Yes
0.756
0.721
21.32
RPTs¼
CRRP
6.236
(36.707)
0.194
(1.963)
–3.376
(–2.698)
–0.638
(–0.322)
0.227
(0.161)
0.954
(0.566)
0.010
(1.718)
–0.462
(–6.227)
–0.072
(–0.793)
0.002
(0.034)
0.083
(1.775)
0.215
(2.650)
1.138
(5.710)
–0.650
(–30.190)
0.622
(11.571)
18352
Yes
0.756
0.721
21.90
RPTs¼
CPRP
6.247
(36.802)
–0.015
(–0.212)
0.246
(0.242)
1.425
(1.163)
–1.316
(–1.175)
2.589
(3.950)
0.010
(1.760)
–0.473
(–6.360)
–0.088
(–0.963)
0.015
(0.218)
0.054
(1.145)
0.216
(2.668)
1.135
(5.698)
–0.652
(–30.287)
0.632
(11.758)
18352
Yes
0.756
0.721
21.31
RPTs¼
RPB
6.245
(36.776)
–0.084
(–2.250)
1.142
(2.279)
1.050
(1.684)
0.372
(0.569)
–1.008
(–1.985)
0.012
(2.015)
–0.498
(–6.653)
–0.099
(–1.073)
–0.005
(–0.077)
0.103
(2.207)
0.211
(2.594)
1.133
(5.683)
–0.650
(–30.171)
0.606
(11.154)
18352
Yes
0.756
0.721
21.45
RPTs¼
LARP
6.243
(36.758)
–0.021
(–0.392)
0.737
(0.956)
–1.378
(–1.241)
1.961
(2.314)
–0.023
(–0.044)
0.011
(1.859)
–0.483
(–6.471)
–0.062
(–0.681)
–0.022
(–0.311)
0.090
(1.911)
0.213
(2.619)
1.138
(5.704)
–0.651
(–30.244)
0.629
(11.705)
18352
Yes
0.756
0.721
21.43
ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA
BE
RPTs¼
RPS
6.242
(36.736)
–0.025
(–1.105)
0.405
(1.185)
0.225
(0.514)
–0.400
(–0.876)
0.188
(0.531)
0.012
(1.981)
–0.492
(–6.508)
–0.085
(–0.916)
0.021
(0.299)
0.081
(1.682)
0.216
(2.666)
1.141
(5.721)
–0.651
(–30.227)
0.631
(11.719)
18352
Yes
0.756
0.720
21.42
Source: Authors’ computation.
13
BSRPT
BIRPT
BERPT
PDRPT
DUALITYRPT
BS
BI
BE
PD
DUALITY
PH
IH
SIZE
LEV
No. of observation
Industry fixed effect
R-squared
Adj. R2
F statistic
Source: Authors’ computation.
RPTs¼
RPSS
6.286
(16.572)
–0.160
(–2.327)
4.861
(3.754)
–2.554
(–1.258)
–2.497
(–1.927)
0.574
(1.170)
0.002
(0.204)
–0.431
(–3.167)
0.092
(0.514)
–0.060
(–0.474)
0.166
(2.490)
0.747
(4.703)
1.023
(3.701)
–0.602
(–14.529)
0.574
(6.487)
5480
Yes
0.805
0.776
27.901
RPTs¼
RRP
6.313
(16.616)
0.101
(1.684)
–0.924
(–0.994)
–1.637
(–1.782)
0.875
(0.938)
–0.362
(–0.210)
–0.004
(–0.417)
–0.356
(–2.623)
0.083
(0.463)
–0.113
(–0.905)
0.183
(2.691)
0.741
(4.666)
1.059
(3.829)
–0.602
(–14.507)
0.567
(6.404)
5480
Yes
0.804
0.775
27.811
RPTs¼
RPP
6.318
(16.618)
–0.053
(–1.097)
0.896
(1.219)
1.214
(0.955)
0.206
(0.246)
–0.637
(–0.525)
–0.001
(–0.108)
–0.400
(–2.909)
0.021
(0.114)
–0.120
(–0.920)
0.198
(2.882)
0.725
(4.552)
1.071
(3.872)
–0.602
(–14.482)
0.577
(6.505)
5480
Yes
0.804
0.775
27.812
RPTs¼
RPRE
6.038
(15.901)
–0.238
(–2.675)
9.062
(5.672)
–4.742
(–1.926)
0.087
(0.051)
1.239
(1.106)
0.002
(0.249)
–0.563
(–4.049)
0.141
(0.759)
–0.125
(–0.975)
0.135
(1.868)
0.693
(4.378)
1.012
(3.677)
–0.566
(–13.603)
0.543
(6.167)
5480
Yes
0.806
0.778
28.210
RPTs¼
CRRP
6.311
(16.608)
0.338
(2.318)
–2.298
(–1.125)
–2.973
(–1.033)
–0.888
(–0.556)
–1.413
(–0.701)
–0.004
(–0.396)
–0.359
(–2.650)
0.066
(0.368)
–0.094
(–0.749)
0.188
(2.854)
0.737
(4.637)
1.070
(3.872)
–0.602
(–14.490)
0.560
(6.320)
5480
Yes
0.804
0.775
27.821
RPTs¼
CPRP
6.294
(16.551)
–0.089
(–0.981)
1.261
(0.820)
2.807
(1.784)
–0.889
(–0.594)
1.198
(1.361)
–0.002
(–0.171)
–0.376
(–2.762)
–0.013
(–0.071)
–0.079
(–0.630)
0.168
(2.553)
0.751
(4.706)
1.085
(3.925)
–0.601
(–14.472)
0.573
(6.461)
5480
Yes
0.804
0.776
27.845
RPTs¼
RPB
6.291
(16.580)
–0.141
(–2.065)
2.474
(2.481)
1.294
(1.497)
–0.861
(–0.736)
–1.705
(–2.189)
–0.001
(–0.137)
–0.408
(–2.985)
0.005
(0.027)
–0.095
(–0.757)
0.211
(3.221)
0.744
(4.683)
1.087
(3.934)
–0.597
(–14.406)
0.534
(5.973)
5480
Yes
0.805
0.776
27.877
RPTs¼
LARP
6.326
(16.652)
–0.044
(–0.589)
2.441
(1.888)
–0.845
(–0.468)
–2.192
(–1.477)
0.769
(1.099)
–0.002
(–0.266)
–0.403
(–2.954)
0.086
(0.477)
–0.077
(–0.606)
0.169
(2.557)
0.727
(4.565)
1.056
(3.816)
–0.602
(–14.514)
0.562
(6.343)
5480
Yes
0.804
0.775
27.828
P. C. ABDUL RASHEED ET AL.
C
RPTs¼
RPS
6.292
(16.542)
0.012
(0.307)
0.036
(0.061)
0.212
(0.230)
–0.049
(–0.070)
–0.090
(–0.146)
–0.004
(–0.389)
–0.375
(–2.711)
0.045
(0.242)
–0.103
(–0.797)
0.185
(2.736)
0.744
(4.671)
1.077
(3.893)
–0.599
(–14.411)
0.565
(6.369)
5480
Yes
0.804
0.775
27.783
14
Table 6. Interaction effect of board characteristics on the relationship between various types of RPTs and firm value (Business Groups).
Table 7. Interaction effect of board characteristics on the relationship between various types of RPTs and firm value (Standalone Firms).
C
BSRPT
BIRPT
BERPT
PDRPT
DUALITYRPT
BS
BI
PD
DUALITY
PH
IH
SIZE
LEV
No. of observation
Industry fixed effect
R-squared
Adj. R2
F statistic
RPTs¼
RPSS
5.979
(31.767)
0.002
(0.036)
1.087
(1.039)
–0.917
(–0.849)
–1.827
(–1.582)
1.025
(1.746)
0.018
(2.340)
–0.516
(–5.800)
–0.096
(–0.892)
0.054
(0.648)
–0.010
(–0.163)
0.132
(1.383)
1.246
(4.630)
–0.659
(–25.976)
0.675
(10.143)
12,872
Yes
0.739
0.701
19.498
RPTs¼
RRP
5.980
(31.762)
0.010
(0.333)
–0.405
(–0.584)
–0.823
(–0.731)
1.440
(1.379)
0.200
(0.343)
0.018
(2.411)
–0.504
(–5.676)
–0.104
(–0.972)
0.027
(0.327)
0.010
(0.154)
0.130
(1.359)
1.226
(4.558)
–0.659
(–25.960)
0.672
(10.097)
12,872
Yes
0.739
0.701
19.485
RPTs¼
RPP
5.984
(31.787)
–0.015
(–0.425)
–0.768
(–1.569)
1.252
(2.296)
0.648
(1.132)
0.443
(0.885)
0.019
(2.464)
–0.479
(–5.328)
–0.148
(–1.364)
0.018
(0.216)
0.001
(0.021)
0.131
(1.370)
1.256
(4.666)
–0.660
(–26.023)
0.674
(10.126)
12,872
Yes
0.739
0.701
19.498
RPTs¼
RPRE
5.911
(31.322)
0.108
(1.573)
1.390
(1.613)
–1.141
(–1.461)
–0.420
(–0.400)
–0.962
(–1.305)
0.015
(1.958)
–0.547
(–6.012)
–0.100
(–0.920)
0.039
(0.456)
0.037
(0.561)
0.122
(1.272)
1.244
(4.624)
–0.646
(–25.338)
0.667
(10.036)
12,872
Yes
0.739
0.701
19.533
RPTs¼
CRRP
5.973
(31.706)
0.144
(1.077)
–3.875
(–2.425)
–0.756
(–0.277)
1.619
(0.684)
2.050
(0.781)
0.018
(2.383)
–0.496
(–5.595)
–0.109
(–1.020)
0.033
(0.400)
0.005
(0.085)
0.129
(1.352)
1.231
(4.576)
–0.658
(–25.898)
0.666
(10.014)
12,872
Yes
0.739
0.701
19.501
RPTs¼
CPRP
5.989
(31.835)
0.072
(0.728)
–0.880
(–0.664)
0.548
(0.307)
–1.542
(–0.975)
3.432
(3.810)
0.017
(2.222)
–0.497
(–5.598)
–0.112
(–1.047)
0.048
(0.577)
–0.033
(–0.522)
0.134
(1.402)
1.212
(4.506)
–0.660
(–26.025)
0.680
(10.228)
12,872
Yes
0.739
0.701
19.524
RPTs¼
RPB
5.991
(31.816)
–0.084
(-1.826)
0.837
(1.411)
1.291
(1.509)
0.625
(0.771)
–0.819
(–1.229)
0.019
(2.587)
–0.526
(–5.882)
–0.134
(–1.241)
0.023
(0.272)
0.023
(0.361)
0.122
(1.277)
1.212
(4.507)
–0.659
(–25.926)
0.652
(9.700)
12,872
Yes
0.739
0.701
19.502
RPTs¼
LARP
5.979
(31.771)
–0.018
(–0.236)
0.235
(0.244)
–0.793
(–0.558)
3.432
(3.214)
–0.612
(–0.843)
0.018
(2.419)
–0.507
(–5.683)
–0.106
(–0.987)
0.000
(–0.004)
0.022
(0.356)
0.128
(1.335)
1.228
(4.556)
–0.659
(–25.962)
0.674
(10.133)
12,872
Yes
0.739
0.701
19.505
ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA
BE
RPTs¼
RPS
5.985
(31.780)
–0.039
(–1.360)
0.570
(1.364)
0.270
(0.523)
–0.676
(–1.141)
0.365
(0.851)
0.020
(2.608)
–0.527
(–5.845)
–0.121
(–1.118)
0.063
(0.732)
–0.002
(–0.025)
0.130
(1.357)
1.229
(4.568)
–0.660
(–25.972)
0.676
(10.149)
12,872
Yes
0.739
0.701
19.487
Source: Authors’ computation.
15
16
P. C. ABDUL RASHEED ET AL.
reduces costs including searching cost, legal cost, information costs … etc. R.P.S.S. is
one of the sources of operating revenue from related parties and P.D. has a negative
interaction on the association between R.P.S.S. and firm value, the coefficient of the
interaction term is 2.488 which is statistically significant at the 1% level. The negative interaction effect of P.D. indicates that promoter directors use R.P.S.S. as tool to
increase their personal wealth which negatively affects the firm market value. P.D.
has a positive interaction effect on the association between L.A.R.P. and firm value
and the relationship is very strong in standalone firms, but this relationship statistically does not exist in business groups. The coefficients are 1.961 in the full sample
and 3.432 in standalone firms both are statistically significant at the 1% level. The
positive interaction of P.D. on the association between L.A.R.P. and firm value indicates that promoter directors encourage loans and advances between related parties
and these loans and advances do not cause the expropriation rather it increase the
value of the firm. Duality has a positive interaction on the relationship between
R.P.S.S. and firm value the interaction term is 0.808 which is statistically significant.
This result proves that when C.E.O. is the chairman of the board, he can understand
that providing services to related parties increase firm revenue and market value and
he uses his position to influence other directors to give approval of R.P.S.S. Duality
has a positive interaction on the association between C.P.R.P. and firm value the coefficients are 2.589 in the full sample and 3.432 in the standalone firm but this relationship is not statistically significant in business group. The empirical evidence proves
that if C.E.O. is in dual position, he encourages acquiring capital assets from related
parties which will reduce the cost of asset acquisition and improve firm value.
Duality has a negative interaction effect on the association between R.P.B. and firm
value, the coefficients are 1.008 in the full sample and 1.705 in business group
and both are statistically significant. The negative interaction effect of duality shows
that if chairman is the executive director, he does not agree with accepting borrowings from related parties due to the chance of expropriation which ultimately causes
a negative impact on firm value.
The board characteristics have a significant impact on firm value. B.S. has a positive impact on firm value but B.I. has a negative impact on firm value, this result
supports the findings of Hamdan and Al Mubarak (2017) that internal managers are
effective and trusted than outside managers. The coefficients of B.E. are not significant in the full sample and the sub samples. Our results do not show any empirical
evidence on the association between P.D. and firm value, none of the coefficients are
significant in the samples. There is a positive association between Duality and firm
value in business group, but this association is not statistically significant in the full
sample and standalone firm. The positive impact of Duality on firm value in business
group prove that the dual position of chairman increases the efficiency of decision
making process and improve firm value. In the full sample and the business groups,
P.H. and I.H. have a positive influence on firm value; but in standalone firms, only
I.H. has an impact on firm value. The relationship between the controlled variables
and firm values are almost in the predicted directions. The positive impact of P.H.
on firm value proves that higher control right of the controlling owners increases the
efficiency and market value. The positive impact of I.H. prove that increase in the
ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA
17
shareholdings of institutional shareholders increases the efficiency of the firm because
the institutional holders can use their professional expertise abilities improve the
value of the firm. The impacts of the controlled variables on firm value are consistent
with the findings of Mishra and Kapil (2018) and Kumar and Singh (2013).
The goodness of the fit of the regression is 0.756 in the full sample, and it varies
from 0.805 to 0.806 in business groups and, R-squared value is 0.701 in standalone
firms. The F-statistics varies from 21.31to 21.445 in the full sample, from 27.783 to
28.210 in business groups and from 19.487 to 19.533 in standalone firms, which show
the model fit. There is no problem of autocorrelation and multicollinearity in the
regression analysis, and we use the method of fixed effect for the estimation of the
coefficients …
5. Conclusion
This study examined the impact of R.P.T.s on firm value and the interaction effect of
governance mechanism on the relationship between R.P.T.s and firm value. This
study is different with the previous studies in two different ways. First, this is the first
study in Indian context which has analysed the R.P.T.s and firm value by examining
the role of governance. Agnihotri and Bhattacharya (2019) and Alhadab et al. (2020)
find that the impact of R.P.T.s vary across countries with different institutional settings, and regulatory environment therefore the findings of the study is informative
to various stakeholders, because they can analyse and evaluate the impact of R.P.T.s
in Indian context. Second, this is the first study that has examined the interaction
effect of board characteristics on the relationship between various types of R.P.T.s
and firm value. The empirical results of the study support the transaction efficiency
hypothesis that R.P.T.s reduce the transaction cost and facilitate resource allocation
between affiliated firms. Based on the empirical findings of our study we accepted the
research hypothesis that R.P.T.s increase firm value. The results of the study are consistent with the findings of Hope and Lu (2019), Wang et al. (2020), Wo et al. (2015)
and Lo and Wong (2016). The empirical evidence of the study is contradictory with
the findings of many studies including Kohlbeck and Mayhew (2010), Nekhili and
Cherif (2011), Bona-Sanchez et al. (2017), Habib et al. (2017b) and Supatmi et al.
(2021). The empirical findings support the findings Wang et al. (2019) that R.P.T.s of
firms which have more group affiliated firms are more likely driven by transaction
cost concern rather than expropriation because the relationship between R.P.T.s and
firm value is very strong in business group. The results confirm the findings of Jia
et al. (2013) that business groups tend to transfer resources to poorly performing
firms through R.P.Ts. The second objective of the study is to examine the impact of
the interaction effect of governance mechanism on the relationship between R.P.T.s
and firm value. B.I. has a positive interaction effect on the relationship between
R.P.T.s and firm value and this result is consistent with the findings of Chien and
Hsu (2010); the interaction effects of other board characteristics are based on the
type of R.P.T.s. These findings prove that directors give special attention while forming policies and decisions connected with R.P.T.s because the interaction effects of
different characteristics of board vary between the types of R.P.T.s. The nature of
18
P. C. ABDUL RASHEED ET AL.
different types of directors is different; executive directors are the directors within the
firm but independent directors are from outside of the firm and promoter directors
may or may not be an active director. Hamdan and Al Mubarak (2017) finds that
internal managers, especially executive directors, are more effective and trusted than
outside managers, because of their knowledge and understanding about the business
and working of the firm. Outside directors, especially independent directors, are
effective because they have diversified knowledge and their primary responsibility is
to protect the interests of minority shareholders. Lo et al. (2010) prove that founder
directors prefer their personal interest than firm interest, but founder directors have a
strong intention for the existence and survival of the firm. The nature, responsibilities, and interests of different types of directors are the reasons for the variability of
the interaction effect of different board characteristics on the relationship between
various types of R.P.T.s and firm value.
This study provides important insights to various stakeholders and makes significant contribution to the literature. The positive impact of R.P.T.s on firm value indicates that R.P.T.s in Indian companies do not cause expropriation of the interests of
minority shareholders and they are likely to increase the wealth of shareholders by
improving the transaction efficiency. The empirical findings of the study also contribute some new evidence to the literature that the governance, especially the board
structure, has a significant impact on R.P.T. decisions. There are limitations in this
study. First the type of industry to which the selected firms belong to has not been
considered in this study, there is a chance to have a minor variation in the results of
the study between various industries. Second, financial companies have been ignored
due to the difference in the form of financial reporting and the variations in regulatory
requirements between financial companies and non-financial companies; therefore, a
separate analysis is required for financial companies. Third, due to non-availability of
data some of the companies listed in BSE have not been considered in this study. Nonavailability of the data is due to companies not preparing and reporting their financial
statements as per the regulatory norms. Overall, our findings have made significant
contribution to the empirical literature on R.P.Ts.
Disclosure statement
No potential conflict of interest was reported by the authors.
ORCID
P. C. Abdul Rasheed
http://orcid.org/0000-0001-6481-3404
Iqbal Thonse Hawaldar
http://orcid.org/0000-0001-7181-2493
T. Mallikarjunappa
http://orcid.org/0000-0001-6993-052X
References
Agnihotri, A., & Bhattacharya, S. (2019). Internationalization, related party transactions, and
firm ownership structure: Empirical evidence from an emerging market. Research in
International Business and Finance, 48(May 2018), 340–352. https://doi.org/10.1016/j.ribaf.
2019.02.004
ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA
19
Alhadab, M., Abdullatif, M., & Mansour, I. (2020). Related party transactions and earnings
management in Jordan: The role of ownership structure. Journal of Financial Reporting and
Accounting, 18(3), 505–531. https://doi.org/10.1108/JFRA-01-2019-0014
Bona-Sanchez, C., Fernandez-Senra, C. L., & Perez-Aleman, J. (2017). Related-party transactions, dominant owners and firm value. BRQ Business Research Quarterly, 20(1), 4–17.
https://doi.org/10.1016/j.brq.2016.07.002
Chauhan, Y., Lakshmi, K. R., & Dey, D. K. (2016). Corporate governance practices, self-dealings, and firm performance: Evidence from India. Journal of Contemporary Accounting &
Economics, 12(3), 274–289. https://doi.org/10.1016/j.jcae.2016.10.002
Chen, J. J., Cheng, P., & Xiao, X. (2011). Related party transactions as a source of earnings
management. Applied Financial Economics, 21(3), 165–181. https://doi.org/10.1080/
09603107.2010.528361
Cheng, S. (2008). Board size and the variability of corporate performance. Journal of Financial
Economics, 87(1), 157–176. https://doi.org/10.1016/j.jfineco.2006.10.006
Chien, C.-Y., & Hsu, J. C. S. (2010). The role of corporate governance in related party transactions. January, 1–27. https://ssrn.com/abstract=1539808
Daie, M. S., & Hasnan, S. (2012). Related party transactions and earnings quality: Moderating
effect of corporate governance. CHUSER 2012 – 2012 IEEE Colloquium on Humanities,
Science and Engineering Research CHUSER (pp. 233–238). https://doi.org/10.1109/CHUSER.
2012.6504316
Diab, A. A., Aboud, A., & Hamdy, A. (2019). The impact of related party transactions on firm
value: Evidence from a developing country. Journal of Financial Reporting and Accounting,
17(3), 571–588. https://doi.org/10.1108/JFRA-08-2018-0064
Downs, D. H., Ooi, J. T. L., Wong, W. C., & Ong, S. E. (2016). Related party transactions and
firm value: Evidence from property markets in Hong Kong, Malaysia and Singapore. The
Journal of Real Estate Finance and Economics, 52(4), 408–427. https://doi.org/10.1007/
s11146-015-9509-0
Elhelaly, M. (2014). Corporate governance and related party transactions research: An assessment of theories and methodologies. Corporate Ownership and Control, 11(2), 578–582.
https://doi.org/10.22495/cocv11i2c6p4
El-Helaly, M. (2016). Related party transactions and accounting quality in Greece.
International Journal of Accounting & Information Management, 24(4), 375–390. https://doi.
org/10.1108/IJAIM-04-2016-0044
Elkelish, W. W. (2017). IFRS related party transactions disclosure and firm valuation in the
United Arab Emirates emerging market. Journal of Accounting in Emerging Economies, 7(2),
173–189. https://doi.org/10.1108/JAEE-05-2015-0035
Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. The Journal of Law
and Economics, 26(2), 301–325. https://doi.org/10.1086/467037
Gallery, G., Gallery, N., & Supranowicz, M. (2008). Cash-based related party transactions in
new economy firms. Accounting Research Journal, 21(2), 147–166. https://doi.org/10.1108/
10309610810905935
Gordon, E. A., Henry, E., & Darius, P. (2004). Determinants of related party transactions and
their impact on firm value. In American Accounting Association 2004 Annual Conference
Paper, 1–60.
Gordon, E. A., Henry, E., & Palia, D. (2004). Related party transactions: Associations with corporate governance and firm value. SSRN Electronic Journal, 9, 1–27. https://doi.org/10.2139/
ssrn.558983
Habib, A., Muhammadi, A. H., & Jiang, H. (2017a). Political connections, related party transactions, and auditor choice: Evidence from Indonesia. Journal of Contemporary Accounting
& Economics, 13(1), 1–19. https://doi.org/10.1016/j.jcae.2017.01.004
Habib, A., Muhammadi, A. H., & Jiang, H. (2017b). Political connections and related party
transactions: Evidence from Indonesia. The International Journal of Accounting, 52(1),
45–63. https://doi.org/10.1016/j.intacc.2017.01.004
20
P. C. ABDUL RASHEED ET AL.
Hamdan, A. M. M., & Al Mubarak, M. M. S. (2017). The impact of board independence on
accounting-based performance. Journal of Economic and Administrative Sciences, 33(2),
114–130. https://doi.org/10.1108/JEAS-03-2017-0012
Hope, O. K., & Lu, H. (2019). Economic consequences of corporate governance disclosure:
Evidence from the 2006 SEC regulation on related-party transactions. The Accounting
Review, 95(4), 263–290. https://doi.org/10.2308/accr-52608
Hope, O. K., Lu, H., & Saiy, S. (2019). Director compensation and related party transactions.
Review of Accounting Studies, 24(4), 1392–1426. https://doi.org/10.1007/s11142-019-09497-w
Hu, S.-H., Li, G., Xu, Y.-H., & Fan, X.-A. (2012). Effects of internal governance factors on
cross-border-related party transactions of Chinese companies. Emerging Markets Finance
and Trade, 48(sup1), 58–73. https://doi.org/10.2753/REE1540-496X4801S105
Hwang, S., & Kim, W. (2016). When heirs become major shareholders: Evidence on pyramiding financed by related-party sales. Journal of Corporate Finance, 41, 23–42. https://doi.org/
10.1016/j.jcorpfin.2016.08.013
Jia, N., Shi, J., & Wang, Y. (2013). Coinsurance within business groups: Evidence from related
party transactions in an emerging market. Management Science, 59(10), 2295–2313. https://
doi.org/10.1287/mnsc.1120.1703
Jian, M. J., & Wong, T. J. (2003). Earnings management and tunneling through related party
transactions: Evidence from Chinese corporate groups. In Proceedings of American
Accounting Association, Annual Conference Paper. https://doi.org/10.2139/ssrn.424888
Klein, A. (2002). Audit committee, board of director characteristics, and earnings management.
Journal of Accounting and Economics, 33(3), 375–400. https://doi.org/10.1016/S01654101(02)00059-9
Kohlbeck, M., & Mayhew, B. W. (2010). Valuation of firms that disclose related party transactions. Journal of Accounting and Public Policy, 29(2), 115–137. https://doi.org/10.1016/j.jaccpubpol.2009.10.006
Kohlbeck, M. J., & Mayhew, B. W. (2004). Agency costs, contracting, and related party transactions. SSRN Electronic Journal, 1–43. https://doi.org/10.2139/ssrn.592582
Kumar, N., & Singh, J. P. (2013). Effect of board size and promoter ownership on firm value:
Some empirical findings from India. Corporate Governance: The International Journal of
Business in Society, 13(1), 88–98. https://doi.org/10.1108/14720701311302431
Liew, C. Y., Alfan, E., & Devi, S. (2015). Independent directors’ tenure, related party transactions, expropriation and firm value: Evidence from Malaysian firms. 5th International
Conference on Corporate Governance.
Lin, W., & Liu, Y. A. (2010). Related party transactions, firm performance and control mechanisms: Evidence from Taiwan. International Research Journal of Finance and Economics,
35(35), 83–97.
Lo, A. W. Y., & Wong, R. M. K. (2016). Silence is golden? Evidence from disclosing relatedparty transactions in China. Journal of Accounting and Public Policy, 35(5), 540–564. https://
doi.org/10.1016/j.jaccpubpol.2016.06.002
Lo, A. W. Y., Wong, R. M. K., & Firth, M. (2010). Can corporate governance deter management from manipulating earnings? Evidence from related-party sales transactions in China.
Journal of Corporate Finance, 16(2), 225–235. https://doi.org/10.1016/j.jcorpfin.2009.11.002
Mishra, R. K., & Kapil, S. (2018). Board characteristics and firm value for Indian companies.
Journal of Indian Business Research, 10(1), 2–32. https://doi.org/10.1108/JIBR-07-2016-0074
Nekhili, M., & Cherif, M. (2011). Related parties transactions and firm’s market value: The
French case. Review of Accounting and Finance, 10(3), 291–315. https://doi.org/10.1108/
14757701111155806
Rasheed, P. C. A., Hawaldar, I. T., & Mallikarjunappa, T. (2021). Related party transactions
and audit risk. Cogent Business and Management, 8(1), 1–17. https://doi.org/10.1080/
23311975.2021.1888669
Rasheed, P. C. A., & Mallikarjunappa, T. (2021). Related party transactions and earnings management: An empirical examination of selected companies in India. IUP Journal of
Accounting Research & Audit Practices, 7(2), 36–50. https://ssrn.com/abstract=3316690
ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA
21
Rasheed, P. C. A., Mallikarjunappa, T., & Thomachan, K. T. (2019). Promoter ownership,
related party transactions and firm performance: A study among selected companies in
India. FIIB Business Review, 8(3), 205–217. https://doi.org/10.1177/2319714519834400
Supatmi, S., Sutrisno, S., Saraswati, E., & Purnomosidhi, B. (2021). Abnormal related party
transactions, political connection, and firm value: Evidence from Indonesian firms.
International Journal of Business and Society, 22(1), 461–478. https://doi.org/10.33736/IJBS.
3189.2021
Wang, H.-D., Cho, C.-C., & Lin, C.-J. (2019). Related party transactions, business relatedness,
and firm performance. Journal of Business Research, 101(January 2018), 411–425. https://doi.
org/10.1016/j.jbusres.2019.01.066
Wang, W. K., Lu, W. M., Kweh, Q. L., & Siao, W. Y. (2020). Related-party transactions and
corporate performance following the adoption of International Financial Reporting
Standards in Taiwan. Managerial and Decision Economics, 41(3), 371–379. https://doi.org/10.
1002/mde.3106
Wang, Y., & Oliver, J. (2009). Board composition and firm performance variance: Australian evidence. Accounting Research Journal, 22(2), 196–212. https://doi.org/10.1108/10309610910987510
Wong, R. M. K., Kim, J.-B., & Lo, A. W. Y. (2015). Are related-party sales value-adding or
value-destroying? Evidence from China. Journal of International Financial Management &
Accounting, 26(1), 1–38. https://doi.org/10.1111/jifm.12023
Yaron, A., Uri, B.-Z., & Ahron, R. (2016). Tunneling or propping? Evidence for related party
transactions in Israel. International Journal of Management Sciences, 7(6), 332–349.
Yeh, Y. H., Shu, P. G., & Su, Y. H. (2012). Related-party transactions and corporate governance: The evidence from the Taiwan stock market. Pacific-Basin Finance Journal, 20(5),
755–776. https://doi.org/10.1016/j.pacfin.2012.02.003