Related party transactions, independent directors and firm performance : Malaysian evidence

Related party transactions (RPTs) are a common business feature as firms frequently conduct their operations through subsidiaries, associates, and joint ventures. However, in the absence of effective monitoring, RPTs can be abused by the corporate insiders. Therefore, the purpose of this study is to examine the effect of RPTs on firm performance and to determine whether this effect is moderated by the proportion of independent directors (INEDs) and their human capital (HC) and social capital (SC). Firm performance is measured by return on assets (ROA), while RPTs are measured based on total RPTs and types of related parties. INEDs’ HC are captured by INEDs’ functional knowledge in accounting and finance and INEDs’ firm-specific knowledge, while INEDs’ SC is proxied by INEDs’ external networking. The measurements are derived from prior research and corporate governance reforms. Using proportionate stratified random sampling, 300 non-financial firms listed under Bursa Malaysia in the year 2013 are
randomly selected. This study employs a moderated multiple regression technique to test the hypotheses. The results reveal that in general, RPTs have a positive effect on firm performance and this effect varies according to the types of parties involved in RPTs. Specifically, this study discovers that firm performance is higher for RPTs involving subsidiaries, associates, and joint ventures. The findings support the efficient transactions hypothesis that RPTs can be used for sound business reasons. The proportion of INEDs and all constructs for INEDs’ HC and SC are revealed to not have any moderating effect on the relationship between RPTs and firm performance. Therefore, the results are not in line with the predictions from the agency, resource dependence, human capital, and social capital theories. The findings of this study provide insights for the investors, companies, regulators, and policy makers regarding the status of RPTs and the role of INEDs in Malaysia.