Are related-party sales value-adding or value-destroying? Evidence from China

This study examines a hitherto underexplored issue of whether and how related-party transactions among firms within the same business group increase or reduce firm value. Using a sample of Chinese listed firms during the period of 2002-2009, we find that abnormally high related-party sales increase firm value. This supports the view that related-party transactions are used as a tool for improving intragroup resource allocation efficiency. However, this value enhancement by related-party sales disappears (i) for firms with a large percentage of parent directors, (ii) for firms with high government ownership, or (iii) for firms with tax avoidance incentives that are often coupled with management’s rent extraction activities. Although we find that intragroup sales improve firm value in general, we also find that controlling shareholders and management use the intragroup sales to deprive value from minority shareholders. Overall, our findings highlight the interplay between the influence of controlling shareholders, corporate tax avoidance, and the value of related-party transactions.