An Analysis Of The Influence Of Related Party Transaction On Corporate Value

Along with the development of the company system and the benefitrelationship between associated parties, a more complex economicphenomena-related party transaction produced, which generally exists in theoperation of all countries’companies. The Transaction Cost Theory holds thatrelated party transaction transforms the market deals as the company’s internalones, which may save the cost, obtain the coordination scale effect, thus they areadvantageous to the promotion of the company’s value. But, Principal-agentTheory actually believes that benefits are usually diverted away from listedcompanies by related parties through their control or significant influence,namely “the tunneling”, which finally harms the company’s value.It follows the causes and effects master line “CorporateGovernance-Related Party Transaction-Corporate Value” to launch theirrelationships. Firstly, the impact of corporate governance on the various types ofrelated party transactions are not also studied from ownership structure, thecharacteristics of the board of directors (supervisors), executive incentive, butfrom an innovative way of the degree of market competition. Secondly,influences of seven kinds of related party transactions (commodity trading,service transactions, leasing, financial transactions, guarantees and mortgages,key management personnel remuneration and other transactions) on thecorporate value are explored and it followed by the study of different directions’(purchase or sale, accept or provide of listed companies)ones. Finally,relevant suggestions are put forward through summing up the conclusion ofempirical research.The following conclusions are received through descriptive and empiricalanalysis:1. The proportion of related party transactions of state-owned listedcompanies is much larger than the non-state-owned ones. However, with thedevelopment of private economy, the private holding companies’ proportionshows an upward trend. From the point of different transactions, in addition tosecured mortgages, the proportion of other ones of state-owned listed companiesis more than60. From the view of manufacturing, related party transactions ofstate-owned companies show a trend of industry concentration, but its ratios arestill maintained at above70%, while the scope and scale of non-state-ownedcompanies are increasing. In the view of related parties, the state-owned listedcompanies’ trasactions with other related parties, except the controllingshareholder which decreased in2010, are much larger than the non-state-ownedlisted companies.2. Corporate governance mechanisms affect the magnitude of the relatedparty transactions. Variables of the largest shareholder ownership, board size,executive compensation and market share are significantly positively related tocertain types of abnormal related party transactions; variables of second to fiveshareholders equity ratio, board size, the type of actual controller, separation of control right and cash flow right, the proportion of independent directors,chairman of the board serve as general manager and executive ownershippercentage are negatively correlated to certain types of abnormal related partytransactions; for Board of Supervisors size and the proportion of holdingsupervisors, this relationship was not significant.3. Related party transactions significantly affect the company value. Fromthe point of different types, leasing, capital transactions and secured mortgagesrelated party transactions have a significantly negative relationship withcompany value. From the angle of occurrence direction, purchase or sale ofgoods, lease the assets of related parties significantly reduce company value,while related party lease listed company’s assets significantly enhancescorporate value.The conclusions of this paper proved that, as a neutral economic behavior,related party transactions not only enhance but reduce corporate value. However,the negative effect of related party transactions on coporate value is moreobvious from the study of state-owned listed companies, which suggests thatbehaviors of interests transfer from the listed companies that reduce companyvalue are more easily through related party transactions due to imperfectcorporate governance mechanisms. Therefore, to further perfect the internalgovernance mechanisms of listed companies, while improving the externalgovernance environment and strengthening the external supervision of listedcompanies is of great significance to the specification of non-fair related party transactions and reduction of interests transfer.