The Effect of Related Party Transactions on Information Asymmetry
Authors:   Asia-Europe Perspective Association, Cheong Eun-Hui , Woo Yong-Sang 
Published: June 2018

There are various related parties outside of company like stockholders or subsidiaries. Companies have tried to expand business for business risk spread or market control expansion. As a result of this try, many subsidiaries have been founded through vertical integration or horizontal integration. Transactions in production process between subsidiaries are necessary in case of vertical integration. Even though in horizontal integration, subsidiaries do a lot of trade with one another for stable operation in the start of business. Companies also do a trade like rental with individual related partied, related party transactions occur in various way.
Many previous studies are examined on the meaning of related party transactions. Previous studies suggest that related party transactions have negative effects on company because managements can decide discretionarily the terms of related party transactions(Cheung et al., 2006; Kim and Woo, 2008; Kim and Woo, 2009; Choi, 2009; Jian and Wong, 2010; Kohlbeck and Mayhew, 2010; Woo and Lee, 2010; Choi, 2010; Lo and Wong, 2011; Kim, 2011; Koh et al., 2011; Kim, 2012; Cho and Kim, 2013; Chung and Chae, 2014; Kim et al., 2016; Lee and Koh, 2016). It is expected that negative opinion on related party transactions continues because major shareholder’s pursuit of private interest through related party transactions recently becomes a serious social problem.
This study examines the effect of related party transactions on information asymmetry. The implication of this study is to provide additional evidence on the nature of related party transactions, which is regarded negatively in many previous studies. Related party transactions increase discretionary accruals, impair accruals quality, and decrease earnings response coefficient(Kim and Woo, 2008; Kim and Woo, 2009; Choi, 2009). According to Jang(2007)’s result that there is a significant positive association between earnings management and information asymmetry, it is expected that related party transactions are positively associated with information asymmetry. However, Coase(1937) insists that related party transactions can be used as a way to reduce a corporation’s cost because it is favorable to get goods from the inside. This assertion means that related party transactions are not related with information asymmetry. It is more likely that related party transactions are done by a management’s discretion when the size of corporation is big. Therefore, related party transactions may reduce a cost when its are used properly in a different corporation’s size. We expect that the effect of related party transactions on bid-ask spread varies according to corporation’s size. Bid-ask spread is used as a proxy of information asymmetry.
The empirical results are as follows. We find that the proportion of related party transactions on total sales is significantly positively associated with bid-ask spread. This result suggests that it is more likely to fail to provide sufficient information to information users when the proportion of related party transactions on total sales is high. Thus, bid-ask spread increases because information asymmetry increases. This positive relation between the proportion of related party transactions on totals sales and bid-ask spread appears only in a large-size corporations groups in our sample. This result means that information users don’t regard related party transactions as to increase information asymmetry in mid-size or small-size corporations group. However, it is more likely for information users to regard related party transactions as a result from the management’s discretionary action in large-size corporations group because there are many related party and various related party transactions in large-size corporations group.