- Log In/Sign Up
- E-ISSN2233-5382
- KCI
E-ISSN : 2233-5382
The Effect of Related Party Transactions on Crash Risk
Abstract
Purpose - This paper examines the effect of related party transactions on crash firm-specific stock price crash risk. Ownership of a typical Korean conglomerate is concentrated in a single family. In those entities, management and board positions are often filled by family members. Therefore, a dominant shareholder can benefit from related party transactions. In Korea, firms have to report related party transactions in financial statement footnotes. However, those are not disclosed in detail. The more related party transactions are the greater information risk. Thus, companies with related party transactions are likely to experience stock price crashes. Research design, data, and methodology - 2,598 firm-year observations are used for the main analysis. Those samples are from TS2000 database from 2009 to 2013, and the database covers KOSPI-listed firms in Korea. The proxy for related party transactions (RTP) is calculated by dividing total transactions to the related-party by total sales. A dummy variable is used as a dependent variable (CRASH) in the regression model. Logistic regression is used to explain the relationship between related party transactions and crash risk. Then, the sample was separated into two groups; tunneling firms and propping firms. The relation between related party transactions and crash risk variances with features of the transaction were investigated. Results - Using a sample of KOSPI-listed firms in TS2000 database for the period of 2009-2013, I find that stock price crash risk increases as the trade volume of related-party transactions increases. Specifically, I find that the coefficient of RPT is significantly positive, supporting the prediction. In addition, this relationship is strong and robust in tunneling firms. Conclusions - The results report that firms with related party transactions are more likely to experience stock price crashes. The results mean that related party transactions increase the possibility of future stock price crashes by enlarging information asymmetry between controlling shareholders and minority shareholders. In case of tunneling, it could be seen that related party transactions are positively associated with stock crash risk. The result implies that the characteristic of the transaction influences crash risk. This study is related to a literature that investigates the effect of related party transactions on the stock market.
- keywords
- Related Party Transaction, Stock Crash Risk
Reference
Chae, S. J., & Hwang, H. J. (2017). The effect of audit quality on crash risk: Focusing on distribution &service companies. Journal of Distribution Science, 15(8), 47-54.
Chen, J., Hong, H., & Stein, J. (2001). Forecasting crashes: Trading volume, past returns, and conditional skewness in stock prices. Journal of Financial Economics, 61, 345-381.
Cheung, Y., Rau, P., & Stouraitis, A. (2006). Tunneling, propping and expropriation: Evidence from connected party transactions in Hong Kong. Journal of Financial Economics, 82(2), 343-386.
Claessens, S., Djankov, S., & Lang, L. (2000). The separation of ownership and control in East Asian corporations. Journal of Financial Economics, 58(1-2), 81-112.
Classens, S., Djankov, S., Fan, J., & Lang, L. (2002). Disentangling the incentives and entrenchment effects of large shareholdings. Journal of Finance, 57, 2741-2771.
Fan, J., & Wong, T. J. (2002). Corporate ownership structure and the informativeness of accounting earnings in East Asia. Journal of Accounting and Economics, 33(3), 401-425.
Gwon, J. H. (2015). Formation of corporate governance in Korea: The rise of chaebols (1910-1980). East Asian Journal of Business Management, 5(4), 67-72.
Han, S. H., Kang, K., & Shin, Y. S. (2016). Bond ratings, corporate governance, and cost of debt: The case of Korea. The Journal of Asian Finance, Economics and Business, 3(3), 5-15.
Hutton, A. P., Marcus, A. J., & Tehranian, H. (2009). Opaque financial reports, R2 and crash risk. Journal of Financial Economics, 94, 67-86.
Jian, M., & Wong, T. J. (2010). Propping through related party transactions. Review of Accounting Studies, 15(1), 70-105.
Jin, L., & Myers, C. S. (2006). R2 around the world: New theory and new tests. Journal of Financial Economics, 79, 257-292.
Johnson, S., Boone, P., Breach, A., & Friedman, E. (2000). Corporate governance in the Asian financial crisis. Journal of Financial Economics, 58(1-2), 141-186.
Kim, J. B., Li, Y., & Zhang, L. (2011). Corporate tax avoidance and stock price crash risk: firm-level analysis. Journal of Financial Economics, 100, 639-662.
Kim, J. B., & Zhang, L. (2016). Accounting conservatism and stock price crash risk: Firm‐level evidence. Contemporary accounting research, 33(1), 412-441.
La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (1999). Corporate ownership around the world. Journal of Finance, 54(2), 471-517.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (2002). Investor protection and corporate valuation. Journal of Finance, 57(1-2), 1147-1170.
Santa-Clara, P., & Yan, S. (2010). Crashes, volatility, and the equity premium: Lessons from S&P 500options. Review of Economics and Statistics, 92(2), 435-451.
Shleifer, A., & Vishny, R. (1997). A survey of corporate governance. Journal of Finance, 52(2), 737-783.
Verrecchia, R. (1983). Discretionary disclosure. Journal of Accounting and Economics, 5, 179-194.
- Downloaded
- Viewed
- 0KCI Citations
- 0WOS Citations