Impact of the Share Structure Reform on the Role of Operating Related Party Transactions in China

Abstract

Prior literature suggests that related party transactions may have a potentially detrimental effect on firm valuation because it undermines the corporate governance benefits a firm offers to minority shareholders. The share structure reform provides a unique opportunity to study to what extent the negative valuation effect of related party transactions interacts with corporate governance. Our empirical analysis confirms that related party transactions are detrimental to firm valuation. More importantly, we show that the negative effect of operating related party transactions on firm valuation declined after the share structure reform, partly due to the fact that the quality of corporate governance improved after the reform.