Where does the money go in related party transactions? Evidence from Korean chaebol affiliated firms

Abstract

Focusing on the impact of the ownership structure of firms engaged in related party transactions (RPTs) on firm profitability, we examined how Korean chaebol affiliated firms use RPTs to transfer wealth. RPTs are found to enhance the profit of firms in which controlling shareholders have a larger financial interest. Interestingly, RPTs improve the performance of these firms only when they are conducted against counterparty firms in which controlling shareholders have low cash flow. These findings imply that chaebol firms effectively transfer wealth for the special favor of controlling shareholders, consistent with the exploitation of minority shareholders in the firms. We contributed to the literature by explicitly demonstrating the direction of wealth transfer in RPTs, which is an underexplored research area owing to the difficulty in identifying the correct ownership structure of a conglomerate group (chaebol) and the direction of RPTs among group subsidiaries. © Rushing Water Publishers Ltd. 2019.