Do cash holdings matter for transactions between affiliated firms? Evidence from BRICS countries

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Abstract

This study aims to look into the effect of cash holdings on related party transactions (RPTs). We also investigate whether the excess cash used for various types of RPTs has any effect on firm value. Our sample includes firms from Brazil, Russia, India, China, and South Africa (BRICS), and we find that RPTs have a negative impact on firm value in Brazil, Russia, India, and South Africa due to agency conflict. Tunneling has a negative impact on firm value in India and China due to the promoter’s opportunistic behavior. We also find that when excess cash is used for RPTs it enhances the firm value in BRICS countries. Using the difference in difference (DID) method, we discover that companies increase their RPT disclosure in the post-mandate compared to the pre-mandate period, augmenting their value. The level of monitoring must vary depending on the nature of RPTs. The negative impact of RPTs is mitigated when excess cash is used for such transactions and RPT disclosure is mandated. We contribute to the RPT literature by demonstrating that tunneling RPTs lower firm value in India and China. Regulators in these countries should implement stringent regulations to reduce value-destroying RPTs. Our findings support agency theory by suggesting that disclosing RPTs in annual reports reduces conflict between controlling and minority shareholders.

Keywords: Corporate Governance, Related Party Transactions, Tunneling, Propping, Cash Holdings, Resource Dependence Theory

Authors’ individual contribution: Conceptualization — A.S. and M.T.; Methodology — A.S.; Software — A.S.; Validation — M.T.; Formal Analysis — A.S.; Investigation — M.T.; Resources — M.T.; Data Curation — A.S.; Writing — A.S.; Visualization — M.T.; Supervision — M.T.; Project Administration — M.T.; Funding Acquisition — M.T.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G30, G32, G34, M41

Received: 05.06.2024
Accepted: 06.09.2024
Published online: 11.09.2024

How to cite this paper: Sasidharan, A., & Thenmozhi, M. (2024). Do cash holdings matter for transactions between affiliated firms? Evidence from BRICS countries [Special issue]. Corporate Ownership & Control, 21(3), 31–44. https://doi.org/10.22495/cocv21i3siart3