The IUP Journal of Corporate Governance
Efficacy of Corporate Governance Performance in Regulating Related Party Transactions: An Analysis of Indian Listed Companies

Article Details
Pub. Date : Jan, 2022
Product Name : The IUP Journal of Corporate Governance
Product Type : Article
Product Code : IJCG30122
Author Name Ajaz Ul Islam
Availability : YES
Subject/Domain : Management
Download Format : PDF Format
No. of Pages : 16



This study investigates the impact of corporate governance practices on Related Party Transactions (RPTs) for a sample of BSE 500 companies in India. The findings of this study advance the earlier understanding that good corporate governance practices inhibit RPTs. Further, the study suggests that the composition of board with active independent directors and compensation structure of Key Management Persons (KMPs) mainly contributes towards inhibiting RPTs. In addition, contrary to earlier studies, auditor compensation and frequency of board meetings were found not to significantly impact RPTs. Finally, deviation of board size from average industry level board size was found to promote RPTs. The implication for stakeholders is also discussed.


Related Party Transactions (RPTs) cover the transfer of resources, services or obligations between a company and a related party, irrespective of whether a price is charged or not (Deloitte, 2014). RPT is a widespread phenomenon (Srinivasan, 2013), which is influenced by economic as well as non-economic motives (Cheung et al., 2006). There have been regulatory concerns on the potential non-economic motives influencing RPT, which has inter-alia attracted regulatory interventions from time to time (Kohlbeck and Mayhew, 2010).

A few empirical studies suggest that RPTs may have positive impact on the performance of the firm, but most of the empirical studies have focused on RPTs' negative implications on shareholder value (Ming and Wong, 2010). Empirical evidence supports the proposition that RPTs have been used by managers/controlling owners for resource tunneling (Enriques and Volpin, 2007), performance propping (Chen and Yuan, 2004) and earnings management (Chen and Chien, 2007), leading to reduced operating performance (Chen et al., 2007; and Srinivasan, 2013) and erosion in the current and prospective shareholder's value (Claessens et al., 2002).

Hence, in order to protect the interest of creditors and non-promoter shareholders, regulators across the globe have taken measures to strengthen corporate governance practices