Corporate Governance and Related Party Transactions in Global Supply Chains

Seungrae Lee (), Michael K. Lim (), Seung Jae Park () and Sridhar Seshadri ()
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Seungrae Lee: Division of International Studies, Hankuk University of Foreign Studies, Seoul 02450, Korea
Michael K. Lim: SNU Business School, Seoul National University, Seoul 08826, Korea
Seung Jae Park: School of Business, Yonsei University, Seoul 03722, Korea
Sridhar Seshadri: Gies College of Business, University of Illinois Urbana-Champaign, Champaign, Illinois 61820; Carle Illinois College of Medicine, University of Illinois Urbana-Champaign, Champaign, Illinois 61820

Manufacturing & Service Operations Management, 2024, vol. 26, issue 4, 1489-1507

Abstract: Problem definition : As related party transactions (RPTs) increase in global supply chains, understanding the impact of corporate governance on such transactions becomes crucial for businesses. RPTs often lead to operational diversion due to power disparities between parent and its subsidiaries. In this study, we explore how operational diversion in RPTs within multinational firms is affected by the roles of foreign subsidiaries and corporate governance mechanisms. Methodology/results : Using a unique data set on RPTs of Korean multinational firms from 2006 to 2013, we compare the performance of multinational firms engaging in RPTs with two types of foreign subsidiaries: vertical and horizontal . We conduct our empirical analysis based on the adoption of International Financial Reporting Standards (IFRS) in Korea in 2011, which acts as a policy shock affecting corporate governance and deterring operational diversion. Our results show that the improvement in operational performance of a multinational firm following the IFRS adoption is more significant when the parent firm engages in transactions with vertical subsidiaries compared with horizontal ones. We further show that strong corporate governance mechanisms, such as internal governance, institutional ownership, and large shareholders, play a crucial role in restraining operational diversion in RPTs involving vertical subsidiaries. Managerial implications : The implications of our study extend to shareholders and auditors, highlighting the importance of prioritizing monitoring efforts concerning a parent firm’s RPTs with vertical subsidiaries, especially when corporate governance mechanisms are weak. In contrast, RPTs with horizontal subsidiaries are relatively robust against operational diversion, making them a natural deterrent to such malpractices.

Keywords: related party transactions; operational diversion; corporate governance; multinational firms; supply chain coordination (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:26:y:2024:i:4:p:1489-1507

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