Corporation Governance, Related Party Transactions And Firm Value

Related party transactions are prevalent in China's listed firms. Transaction cost theory postulates that related party transactions can reduce transaction costs and increase firm value by transforming the transactions from market to company inside. But agency theory states that the related parties may have controlling rights or great influences on the listed company, and transfer the firms' resources via related party transactions, resulting in a negative impact on firm value.The related party transactions from a sample of listed firms in Shanghai and Shenzhen Stock Exchange are classified into six types: goods transactions, service transactions, guarantees, asset restructurings and others. The conclusions from the empirical analysis on the relationships between corporation governance, related party transactions and firm value are as follows.1. Corporation governance has an effect on abnormal related party transactions. Executive compensation, the percentage of shares held by the top executives, the CEO being the chairman of the board of directors, issuing shares to foreign investors have negative effects on some types of abnormal related party transactions. On the contrast, Z index, Herfindahl5 index, director board size, the ratio of independent directors, supervisory board size, de facto controller being the government are significantly and positively related to some types of abnormal related party transactions. But the percentage of supervisors who hold the shares in the supervisory board has no significant effect on abnormal related party transactions.2. Goods transactions and guarantees reduce firm value significantly, which substantiates the hypothesis of agency theory.3. Goods transactions and guarantees increase the agency costs of listed firms significantly, thus reduce firm value.In summary, because of the faultiness of corporation governance mechanics, related parties have more opportunities to transfer the firms' resources via goods transactions and guarantees. To regulate the abnormal related party transactions, some suggestions are put forward on perfecting internal corporate governance, improving external governance environment and strengthening external supervision of listed firms.