Are related-party transactions beneficial or detrimental in emerging markets? New evidence of financial services agreements from China

Huan Dou, Yuanyuan Liu, Yaru Shi and Hanwen Xu

International Review of Financial Analysis, 2022, vol. 81, issue C

Abstract: This paper examines a new and underexplored form of related-party transactions in which Chinese listed companies sign financial services agreements with affiliated finance companies within the same business group. With FSAs, listed companies can readily finance through internal capital markets. However, some concerns controlling shareholders can use FSAs to embezzle funds of listed companies legitimately, thereby expropriating the wealth of minority shareholders. Using a staggered difference-in-differences model with fixed effects, we empirically examine the economic consequences of FSAs. We document that FSAs are detrimental to listed companies' market valuation and operating performance. This phenomenon mainly concentrates on companies without financial constraints and those with lower bankruptcy risks. Further analysis shows that sound corporate governance could inhibit the signing of FSAs ex-ante. This paper contributes to the literature on the economic consequences of related-party transactions in emerging markets. It also provides empirical support that the internal capital market of business groups in China is inefficient and offers controlling shareholders opportunities for tunneling.

Keywords: Related-party transactions; Financial services agreements; Firm value; Operating performance; China (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:81:y:2022:i:c:s1057521922001107

DOI: 10.1016/j.irfa.2022.102144

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