Corporate Governance and Related Party Transactions in Global Supply Chains

Seungrae Lee, Michael K. Lim, Seung Jae Park, Sridhar Seshadri
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Abstract

Problem definition: As related party transactions (RPTs) increase in global supply chains, understanding the impact of corporate governance on such transactions becomes crucial for businesses. RPTs often lead to operational diversion due to power disparities between parent and its subsidiaries. In this study, we explore how operational diversion in RPTs within multinational firms is affected by the roles of foreign subsidiaries and corporate governance mechanisms. Methodology/results: Using a unique data set on RPTs of Korean multinational firms from 2006 to 2013, we compare the performance of multinational firms engaging in RPTs with two types of foreign subsidiaries: vertical and horizontal. We conduct our empirical analysis based on the adoption of International Financial Reporting Standards (IFRS) in Korea in 2011, which acts as a policy shock affecting corporate governance and deterring operational diversion. Our results show that the improvement in operational performance of a multinational firm following the IFRS adoption is more significant when the parent firm engages in transactions with vertical subsidiaries compared with horizontal ones. We further show that strong corporate governance mechanisms, such as internal governance, institutional ownership, and large shareholders, play a crucial role in restraining operational diversion in RPTs involving vertical subsidiaries. Managerial implications: The implications of our study extend to shareholders and auditors, highlighting the importance of prioritizing monitoring efforts concerning a parent firm’s RPTs with vertical subsidiaries, especially when corporate governance mechanisms are weak. In contrast, RPTs with horizontal subsidiaries are relatively robust against operational diversion, making them a natural deterrent to such malpractices.Funding: This work was supported by the Institute of Management Research at Seoul National University, the Hankuk University of Foreign Studies Research Fund [2023], and the Research Fellowship Fund of the Sangnam Institute of Management, Yonsei University [2020-22-0007].Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2022.0372 .
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全球供应链中的公司治理和关联方交易
问题定义:随着全球供应链中关联方交易(RPT)的增加,了解公司治理对此类交易的影响对企业来说至关重要。由于母公司与其子公司之间的权力差异,RPT 往往会导致业务转移。在本研究中,我们将探讨跨国公司内部 RPT 的运营分流如何受到国外子公司角色和公司治理机制的影响。方法/结果:利用 2006 年至 2013 年韩国跨国公司 RPT 的独特数据集,我们比较了跨国公司与两类外国子公司(纵向和横向)进行 RPT 的绩效。我们的实证分析是基于 2011 年韩国采用《国际财务报告准则》(IFRS)这一影响公司治理和阻止业务转移的政策冲击。我们的结果表明,与横向子公司相比,母公司与纵向子公司进行交易时,采用《国际财务报告准则》后跨国公司经营业绩的改善更为显著。我们进一步表明,强有力的公司治理机制,如内部治理、机构所有权和大股东,在抑制涉及纵向子公司的 RPT 交易中的经营转移方面发挥着至关重要的作用。对管理者的启示:我们的研究对股东和审计师都有启示,强调了优先监督母公司与纵向子公司的 RPT 的重要性,尤其是在公司治理机制薄弱的情况下。相比之下,与横向子公司的 RPT 对业务转移的影响相对较小,因此对此类不当行为具有天然的威慑力:本研究得到首尔国立大学管理研究所、韩国外国语大学研究基金[2023]和延世大学尚南管理研究所研究奖学金基金[2020-22-0007]的支持:在线附录见 https://doi.org/10.1287/msom.2022.0372 。
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