Impact of Corporate Governance on Related Party Transactions in Family-Owned Firms in Pakistan
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Abstract
This study empirically examined the impact of corporate governance (CG) variables, namely, independent directors index (IDI), family directorship (FD), and family ownership (FO), on the types of related party transactions (RPTs) that prevail in family-owned firms in developing countries, such as Pakistan. Major shareholders of Pakistani family-owned firms expropriate resources through RPTs. This study analyzed the panel data of 108 firms of family-owned firms listed on the Karachi stock exchange from 2004 to 2014 after CG codes emerged in 2002. The study contributes to literature by categorizing all RPTs into three types, namely, RPTb, RPTe, and RPTo. It has also developed index of independence directors comprising three dimensions, namely, board composition, financial expertise, and tenure of the independent non-executive director. Different panel least squares Models for different RPTs have been employed to examine the relationship between RPTs and CG variables. This study found that 90% of family-owned firms in Pakistan scored low for independent director’s index. Hence, corporate governance is weaker in Pakistani family- owned firms where major shareholders expropriate resources through some RPTs, i.e., RPTb and RPTe. It further empirically found that CG variables, namely, IDI and FD are negatively related with RPTs. Furthermore, the concentration of family ownership of family-owned firms has a negative relationship with RPTs, and this concentration has a negative tendency for the resource expropriation of family-owned firms. This negative relationship of corporate governance and concentration of major shareholder exploit the interest of minority shareholders in Pakistani family-owned firms.
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