Related-party Transactions and Asymmetric Cost Behavior

This study examines whether related-party transactions impact firms’ asymmetric cost behavior. We find that firms with higher level of related-party transactions present greater cost stickiness. We also find that related-party transactions in firms with high proportion of largest shareholders’ ownership lead to greater cost stickiness. Our finding suggests that information asymmetry between managers and outside stakeholders caused by related-party transactions triggers managers to maintain unutilized resources even when demand falls so that they can maximize their personal utility, resulting in cost asymmetry. This paper contributes to the extant literature by providing additional evidence that related-party transactions which exacerbate agency problems may lead to cost stickiness.