Related Party Transactions and firm value: the role of governance mechanism

Abstract

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.