The Effect of Related Party Transactions on the Performance of Indonesian Listed Companies

Abstract

Abstract. The purpose of this paper is to analyze the impact of related party transactions (RPTs) on company performance using a panel data regression on 388 non-financial companies listed in Indonesia Stock Exchange during the 2015-2018 period. RPT variables used in this study are divided into several categories, namely transactions with related parties in the operational field (operational RPTs), financial field (financial RPTs), other fields (other RPTs), and total RPTs (sum of the three previous types). The study finds a significant negative relationship between financial RPTs and other RPTs on company performance. This finding is consistent with the precedent research that non-operational RPTs (i.e., financial RPTs and other RPTs) are commonly used by controlling shareholders as tunneling channels to expropriate minority shareholders. The results suggest policymakers to monitor more closely RPTs, particularly financial and other RPTs, that are more likely to be used as tunneling activities that are detrimental to firm performance. The results of this study are robust to various proxies of firm performance, providing additional empirical studies on RPTs in emerging countries with concentrated ownership structure, and shedding direct light on which type of RPTs that is mainly used as tunneling channel. Keywords: Efficient transaction hypothesis, firm performance, Indonesia, related party transactions, type II agency problem