Buying inferior to selling: Explore the impact of transaction direction on the effects of related-party transactions

by Shuang Li, Jie He

Throughout, the effects of related-party transactions (RPTs) have been a hot topic in financial markets and corporate governance research. This paper analyzes the theoretical foundation of the effects of RPTs and constructs a new indicator, the quasi-profit margin, to assess the effects of RPTs by studying their impact on the quasi-profit margin. Based on the information asymmetry between transaction parties and the information screening theory, the paper proposes the buying inferior to selling theory, systematically explaining the impact of transaction direction on the effects of RPTs. Subsequently, using panel data from Chinese A-share listed companies from 2016 to 2021, the paper constructs fixed-effects models and conducts empirical studies from both exogenous and endogenous perspectives, employing estimation methods such as high dimensional fixed effects method, two-stage least squares method, and three-stage least squares method. The research indicates that RPTs of Chinese A-share listed companies generally exhibit a tunneling effect, and the transaction direction significantly affects the effects of RPTs. The higher the proportion of RPTs conducted as sellers to the total RPTs, the smaller the overall tunneling effect of the RPTs. This study has implications for reducing the tunneling risk of RPTs and improving corporate governance for listed companies, as well as providing some references for financial regulatory authorities to identify and rectify illegal RPTs.