The IUP Journal of Corporate Governance
Do Different Types of Related Party Transactions Impact Firm Performance Differently? Evidence from Emerging Markets

Article Details
Pub. Date : Apr, 2020
Product Name : The IUP Journal of Corporate Governance
Product Type : Article
Product Code : IJCG30420
Author Name :Nitya Nand Tripathi, Sudhakara Reddy Syamala, Kavita Wadhwa
Availability : YES
Subject/Domain : Management
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No. of Pages : 14

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Abstract

This paper is a study of the effectiveness of different types of Related Party Transactions (RPTs) on firm performance in the Indian context. The corporate governance mechanism of India has changed evolutionarily after the implementation of Clause 49 the Listing Agreements. According to Clause 49, the Listing Agreements of RPTs are approved by the audit committee, a mechanism which is unique and different from other developed and emerging countries. Hence, this paper intends to investigate the impact and behavior of various RPTs on firm performance and whether the pre-approval mechanism helps to mitigate the management's opportunistic behavior of transferring the resources from the company through RPTs or whether it has no impact. The paper empirically examines the effect of RPTs on firm performance for the period 2003-2016. It uses 9,140 firm-years for the empirical analysis and also uses firm and fixed effect as part of the research methodology. The study finds that there are positive as well as negative impact of different types of RPTs on firm performance.


Description

Related Party Transactions (RPTs) denote any financial activities between related parties.1 According to Accounting Standard2-18 (AS-18), related parties means "if one party has the ability to control or significantly influence the other in making financial and/or operating decisions in a particular reporting period." Presently, RPTs have emerged as a major issue in capital markets, which have become an essential concern between regulators and other stakeholders to monitor and audit RPTs (Johnson et al., 2000). The major types of RPTs in India are related party sales, related party expenses, loans given to related parties and loans taken from related parties. There have been many examples of pilfering of firm's resources by controlling shareholders or managers through RPTs (Gopalan et al., 2007). Several unlawful activities in developed and emerging countries show that RPTs are used to prop up the earnings and also used to divert the resources from the company (Kohlbeck and Mayhew, 2010). Unlawful financial activities around the world have lessened the investors' faith in published company's accounts; such unlawful activities have brought RPTs under the spotlight (Chen et al., 2011). Some scholars argue that RPTs, with all the information, result in efficient transactions which can lead to maximization of shareholder value by reducing the transaction costs (Khanna and Palepu, 1997). Other scholars reported that RPTs could reduce the firm's value as transactions take place from the conflicts of benefits among major stakeholders and other stakeholders whenever RPTs took place for the benefits of the major shareholders which extract the resources from minority shareholders (Chang and Hong, 2000).

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