Are related-party sales value-adding or value-destroying? Evidence from China

M. K., Raymond WONG, Jeong Bon KIM, Wai Yee, Agnes LO

Research output: Journal PublicationsJournal Article (refereed)

17 Citations (Scopus)

Abstract

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.
Original languageEnglish
Pages (from-to)1-38
Number of pages38
JournalJournal of International Financial Management and Accounting
Volume26
Issue number1
Early online date19 Jan 2015
DOIs
Publication statusPublished - Feb 2015

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China
Firm value
Related party transactions
Incentives
Tax avoidance
Economic consequences
Minority shareholders
Ownership structure
Insider
Rent extraction
Business groups
Government ownership
Enhancement

Cite this

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abstract = "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.",
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Are related-party sales value-adding or value-destroying? Evidence from China. / WONG, M. K., Raymond; KIM, Jeong Bon; LO, Wai Yee, Agnes.

In: Journal of International Financial Management and Accounting, Vol. 26, No. 1, 02.2015, p. 1-38.

Research output: Journal PublicationsJournal Article (refereed)

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