Do firms benefit from related party transactions with foreign affiliates? Evidence from Korea

We extend the existing literature on related party transactions (RPTs) from a domestic to an international dimension and uncover new evidence of resource transfer by foreign direct investment (FDI) firms to their foreign affiliates through overseas RPTs. Employing uniquely‐constructed RPT data of Korean firms during 2005–2010, we find significantly negative effects of such transactions on the values of parent firms, which are further confirmed from two‐stage least square regressions after correcting for the endogeneity issue. Further analyses reveal that negative valuation effects are most pronounced for overseas RPTs of FDI firms which are in the high‐tech industry and whose foreign affiliates are in emerging countries. These results indicate that high‐tech FDI firms use RPTs as a means of transferring resources to support their poorly‐performing foreign affiliates in emerging countries, especially surrounding the global financial crisis. We find little evidence that FDI firms use RPTs to withdraw or tunnel investment returns of foreign affiliates back to the home country for the benefits of investing firms during our sample period.