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Are Related‐Party Sales Value‐Adding or Value‐Destroying? Evidence from China
Author(s) -
Wong Raymond M. K.,
Kim JeongBon,
Lo Agnes W. Y.
Publication year - 2015
Publication title -
journal of international financial management and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.818
H-Index - 37
eISSN - 1467-646X
pISSN - 0954-1314
DOI - 10.1111/jifm.12023
Subject(s) - incentive , value (mathematics) , business , enterprise value , shareholder , government (linguistics) , china , sample (material) , monetary economics , accounting , microeconomics , economics , finance , corporate governance , linguistics , philosophy , chemistry , chromatography , machine learning , computer science , political science , law
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.