Economic conditions and related party transactions in India

Abstract

We investigate the impact of innovations in the level of economic activity—first-moment shocks—and its volatility, or uncertainty—second-moment shocks—on related party transactions (RPT) in India. Related parties face trade-offs between supporting the firm and extracting the private benefit, given the nature of first and second-moment shocks. Using fixed effects panel data regression for India, we find that during periods of high economic growth and low uncertainty, firms engage more in related party transactions to leverage existing relationships with affiliated entities, reduce transaction costs, and support one another. Furthermore, we find that the effect of economic growth on RPT increases after the enactment of the Indian Companies Act (2013), which mandates shareholders’ approval for material-related party transactions. We also explore the motives of RPT and find that this increase is due to business RPT and not opportunistic RPT, confirming the increase in economic activities. Apart from this, we also find that this relationship is more pronounced in manufacturing and profitable firms. We confirm our results using various robustness exercises such as alternate measures, instrumental variables, and serial correlation.