The effect of related party transactions on R&D investment: Evidence from Korea

Abstract

This study aims to investigate the relationship between related party transactions and a firm’s investment in research and development (R&D), as well as the moderating effect of a firm’s financial health on such a relationship. The study applies a fixed-effect panel regression model with a sample of 13,619 Korean listed firms for the period from 2001 to 2020. The results indicate that related party transactions significantly and positively influence a firm’s R&D investment at the 1% level for the study period. Specifically, when related party transactions are divided into operating and non-operating, the results show that only non-operating related party transactions significantly and positively affect firms’ investment in R&D. Moreover, findings report that the effect of related party transactions is stronger for firms with financial distress, lower cash holdings, and in the high-tech industry. The results imply that related party transactions promote a firm’s R&D investment, which is one of the primary business investments that create a firm’s competitive advantage and value. Moreover, the results propose that related party transactions should be carefully evaluated when accessing the firm’s investment behavior.

Keywords

• internal capital markets
• R&D activities
• R&D investments
• related party transactions
• research and development