Related Party Transaction, Firm Performance and Institutional Ownership

• Main Author: Cui, Jingyu
• Other Authors: Dutta, Shantanu
• Format: Others
• Language: en
• Published: Université d'Ottawa / University of Ottawa 2021
• Subjects: Related Party Transaction; Firm Performance; Institutional Ownership
• Online Access: http://hdl.handle.net/10393/42537; http://dx.doi.org/10.20381/ruor-26757

This paper investigates the impact of related party transactions on a firm’s operating performance and market-based performance, as well as the impact of institutional ownership on the use of related party transactions. Using a sample of 1218 deals from S&P1500 firms from 2007 to 2018, we propose and examine three relevant hypotheses: (a) related party transactions, especially, “Red-flag” related party transactions are negatively related to firm’s operating performance, (b) related party transactions, especially, “Red-flag” related party transactions are negatively related with firm’s marketbased performance, (c) institutional ownership is negatively related with related party transactions. In summary, we do not find a significant relationship between related party transactions and firm’s operating performance, such as ROA, Profit Margin and COGS. As for firm’s market-based performance, we found related party transactions are positively related with Tobin’s-Q, but are not significantly related with 12-months buy and hold abnormal return. Finally, we do not find any significant relationship between overall institutional investors and RPTs, but we find short-horizon institutional investors reduce the use of related party transactions, but long-horizon institutional investors do not limit the use of RPT