Related Party Transactions and Corporate Social Responsibility: Evidence from Korea

Abstract

This study investigates whether related party transactions (RPTs) are associated with corporate social responsibility (CSR). Analyzing Korean public companies, we find that firms with more RPTs show poor CSR performance, especially in terms of soundness and fairness. The results are only maintained in firms with low ownership of controlling shareholders, supporting the conflict-of-interest view related to RPTs. Furthermore, we find that RPTs of firms held low by controlling shareholders do not contribute to firm value. Our results indicate that the expropriation of profits or resources through RPTs negatively affects the CSR decision of affiliations, which acts as a deterrence to long-term growth. In emerging markets where RPTs within a business group are prevalent, a government needs to restrict RPTs which are beneficial only for controlling shareholders and to encourage CSR activities of affiliations with low controlling ownership.