Ownership Concentration and the Value Effect of Related Party Transactions

Abstract

We investigate 218 Related Party Transactions (RPTs) in Israel, an economy characterized by a high percentage of closely held firms, and identify a non-linear inverted U connection between the value effect of RPT and the level of firm ownership concentration. This non-linear connection is similar to the worldwide documented quadratic (inverted U) relation between ownership concentration and a firm's Tobin's Q. The relation becomes even stronger statistically, when we measure ownership concentration using a strategic power approach, in an attempt to identify the source of this puzzling connection.