This study was conducted to find out the effect of related party transactions and controlling shareholders' ownership on the firm value. 6,831 firm·year samples of Korean companies listed in KRX were used for analysis. The duration of the data is from Jan. 2004 to Dec. 2015.
Equation of the related party transactions and the equation of the firm value were set following the hypothesis. And data was analyzes by use of regression and 2SLS method simultaneously. Results of the analysis are as follows.
Firstly, related party transactions in terms of long term contract, equity, and credit showed statistically meaningful results which are consistent with the tunneling theory, efficiency theory, and agency theory. The volume of realted party transactions in terms of the long term contract tends to increase as the controlling shareholder's ownership decrease. This can be interpreted as that tunneling incentives of the controlling shareholders activates when their shares are getting lower. This tunneling incentives affect the firm value negatively. And the bigger the difference between ownership and control rights, the more incentives for tunneling by controlling shareholders prevails. Consequently the firm value is affected negatively, either.
The volume of related party transactions in terms of the equity increases as the controlling shareholders' ownership increases and this results in positive effect on the firm value. This can be interpreted as the efficiency theory works.
The volume of related party transactions in terms of the credit increases as the controlling shareholders' rights increases. This results in the negative effect on the firm value. This can be interpreted as the agency theory works.
Secondly, other 2 types of related party transactions such as assets and business trade and loans did not show significantly meaningful results. One reason was that the volume of related party transaction was so small comparing to the total asset of respective firm. The other reason was that the relationship between the controlling shareholders' ownership and the firm value was so inconsistent that the analytical results couldn't be interpreted from the statistical view points.
In summary, related party transactions of Korean companies cannot be classified according to the one-sided view point of tunneling, or efficiency theory. So the contingency theory as Pizzo suggested should be taken into consideration.
Korean authority is tightening the regulation on related party transactions considering the negative effect that related party transactions. This also seems to squeez the volume of related party transactions.
In case of related party transactions in terms of asset and business trade and loan, there was not significant result because the frequency and volume was so small that the results of analysis could not be generalized. This could not be interpreted to mean that the companies did not do such types of related party transactions.
In general, it is known that the bigger the volume of ralated party transactions, the more negative effects on the firm value results. However, related party transactions in terms of equity showed positive effect on the firm value. So it is suggested that authority should rule the related party transactions with tunneling purpose which has negative effect on the firm value. But if they were used properly for enhancing the firm value, they should be allowed accordingly.