The Influence of Family Firms on Related Party Transactions and Associated Valuation Implications

• In Event: DSFI: Part II

Abstract

We investigate whether the presence of related party transactions (RPTs) leads to a reduction in the previously documented family firm value premium (Anderson and Reeb 2003). While RPTs have been shown to be strategic in some situations and opportunistic in others (Kohlbeck and Mayhew 2010; Ryngaert and Thomas 2012), family firms are particularly prone to rent-extraction (opportunism) through RPTs because family firms tend to have more power than their ownership stakes would predict. However, family members are also concerned about the firm’s reputation. Following the preponderance of family firm research supporting the opportunistic view, we expect that family firms are more likely to report RPTs. We also expect the family firm value premium is less for family firms that report RPTs due the existence of agency conflicts between controlling and minority shareholders (type II agency costs) and the potential opportunistic behavior represented by RPTs. Based upon an extensive hand-collected sample, we find that family firms are more likely to enter into RPTs and that the family firm value premium declines when family firms report RPTs.

Authors

• Mark Kohlbeck, Florida Atlantic University

• Hye Seung Lee, Fordham University

• Brian Mayhew, University of Wisconsin-Madison

• Jesus Salas, Lehigh University