Internal Transaction and Firm Value with Governance and Diversification Perspectives

Internal transactions prohibit competitive market pricing mechanism and pervert efficient allocation of corporate resources, and consequently hurt firm value. Most extant theories or empirical researches advance concordant evidence. We test if internal transaction - whether it is financial or physical - hurts firm value. What is unique with our approach is that we divide internal transactions into two categories: financial vs. physical transactions. We focus on highly diversified firms, which are mostly chaebol affiliated firms in Korea. Our results show that internal transaction, especially physical internal transaction, is significantly and negatively related to firm value, supporting our hypothesis. Financial internal transaction shows no significance against firm value. Further, diversification is shown to be adversely associated with firm value.