Related Party Transactions, Investments and External Financing

• In Event: Related Parties and External Financing, NFP Whistleblowing, & Effectiveness of Online Adaptive Learning Technologies

Abstract

We investigate the association of related party transactions (RPTs) classified as tone and business with a firm’s capital allocation efficiency. We expect that tone RPTs (opportunistic) but not business RPTs (efficient contracting) are associated with inefficiencies in capital allocation, that is, less than optimal investment levels and external financing. We examine investment sensitivity and external financing sensitivity to both Tobin’s Q and internally generated cash flows. We provide evidence that tone RPTs, but not business RPTs are associated with distorted investment sensitivity to Q, higher investment sensitivity to internally generated cash flows, lower external financing sensitivity to Q, and higher external sensitivity to internally generated cash flows. Further, we provide evidence consistent with the inefficiencies associated with tone RPTs resulting in lower future firm accounting and share performance. Our study contributes to the ongoing debate on the costs and benefits of RPTs and provides evidence that all RPTs are not the same.

Authors

• Avishek Bhandari, Florida Atlantic University - Boca

• Mark Kohlbeck, Florida Atlantic University

• Brian Mayhew, University of Wisconsin-Madison