Do related party transactions promote or depress a firm’s investment in organization capital?

ABSTRACT

We examine whether related party transactions influence a firm’s investment in organization capital, using a sample of Korean firms from 2001 to 2020. Given that the high magnitude of related party transactions increases a firm’s dependence on the captive market within related parties, we hypothesize that a firm’s incentives to invest in intangible capital are low when there are heavy related party transactions. We find the negative relationship between related party transactions and a firm’s investment in organization capital, consistent with the notion that related party transactions significantly impact the firm’s operations. We also find that such a relationship is more pronounced for firms in the high-tech industry and those that are financially weak.

KEYWORDS:

• Related party transactions
• organization capital
• investment
• intangible assets
• intangible capital

JEL CLASSIFICATION:

• D23
• E22
• M10
• M41

Disclosure statement

There are no conflicts of interest to declare.

Data statement

Data are available in TS2000, KIS-Value, and FnGuide database (equivalent to Compustat in the United States).