Monitoring Mechanism, Corporate Governance and Related Party Transactions

Given the fact that related party transaction (RPT) exists, the present study aims to enquire whether and how different types of governance structure will affect the impact of RPT upon corporate performance. We find that, companies with unitary leadership and companies with over 40% divergence between controlling rights and cash flow rights, RPT creates a negative impact on performance. Among companies with internalized supervisors, we find that those with a unitary leadership have a poorer performance than those with a dual leadership, and those with an over 40% divergence between controlling rights and cash flow rights report a poorer performance than those with a below 40% divergence. In contrast, the companies with non-internalized supervisors do not exhibit a significant difference in business performance even though they differ in governance. The difference in performance is explained by the fact that a company's monitoring mechanism is crippled by internalized of supervisors, thus allowing more leeway for RPT tunneling.