Are Related-Party Sales Value-Adding or Value-Destroying? Evidence from China

Prior literature provides mixed and relatively little evidence on the economic consequences of related‐party transactions. We examine a hitherto underexplored issue of whether transactions among firms within the same business group increase or reduce firm value. Using a large sample of Chinese liste...

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Bibliographic Details
Published in:Journal of international financial management & accounting 2015-02, Vol.26 (1), p.1-38
Main Authors: Wong, Raymond M. K., Kim, Jeong-Bon, Lo, Agnes W. Y.
Format: Article
Language:English
Subjects:
Accounting
China
Economic impact
Economic incentives
Financial management
Management
Ownership
Sales
Stockholders
Studies
Tax avoidance
Values
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Summary:Prior literature provides mixed and relatively little evidence on the economic consequences of related‐party transactions. We examine a hitherto underexplored issue of whether transactions among firms within the same business group increase or reduce firm value. Using a large sample of Chinese listed firms, we find that related‐party sales increase firm value. However, this value enhancement disappears for firms with (i) large percentage of parent directors, (ii) high government ownership, or (iii) tax avoidance incentives that often couple with management's rent extraction activities. Although we find that intragroup sales improve firm value in general, we also find that corporate insiders use intragroup sales to deprive value from minority shareholders. Overall, our findings highlight the interplay between ownership structure and tax avoidance incentives in determining the economic consequences of related‐party transactions.
ISSN:0954-1314
1467-646X
DOI:10.1111/jifm.12023