Related-party Transactions and Asymmetric Cost Behavior

This study examines whether related-party transactions impact firms’ asymmetric cost behavior. The results show that firms with higher level of related-party transactions present greater cost stickiness. This 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. Also, related-party transactions in firms with high proportion of largest shareholders’ ownership lead to greater cost stickiness. The results imply that as largest shareholders have incentive to transfer the wealth of minority shareholders to themselves, high level of related-party transactions in firms where the largest shareholders own a high proportion of the firms’ shares leads to greater cost stickiness. This paper contributes to the extant literature by providing additional evidence that related-party transactions which exacerbate agency problems may lead to cost stickiness.