Related Party Transactions and Firm Value: Evidence from Property Markets in Hong Kong, Malaysia and Singapore

Posted: 14 Apr 2016

See all articles by David H. Downs

David H. Downs

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate; The Kornblau Institute

Joseph T. L. Ooi

National University of Singapore (NUS) - Department of Real Estate

Woei Chyuan Wong

Universiti Utara Malaysia

Seow Eng Ong

National University of Singapore (NUS) - Department of Real Estate

Date Written: April 12, 2016

Abstract

This paper offers new evidence as to how RPTs can be value enhancing for minority shareholders. In doing so, we address an ongoing theoretical tension in the related party transaction (RPT) literature by focusing on real estate investment trusts (REITs) in Asia. The empirical evidence is mixed in the corporate finance literature on whether RPTs create or destroy firm value. On average, REITs in our sample engaged in RPT's amounting to 5.4% of total assets, annually, between 2003 and 2010. This is not a trivial amount and is nearly double the 2.8% RPT rate for U.S. industrial firms. We identify tree main channels for REIT RPTs: real estate asset acquisitions from related parties (57.4%), income earned from related parties (22.2%) and management fees paid to related parties (14.8%). The identification strategy we employ relises on two distinct methodologies when examining RPTs and firm value: a multivariate regression approach and, secondly an exogenous wealth effects test for RPT announcements. Overall, the results suggest that REIT managers and sponsors do not expropriate wealth from their minority shareholders through RPTs. We find evidence that an ad hoc acquisitions pipeline from sponsor to REIT generally drives the value and wealth proposition, although the impact could be reversed in a credit crisis.

Keywords: Related party transactions; Firm value; Corporate governance; REITs

Suggested Citation

Downs, David H. and Ooi, Joseph T. L. and Wong, Woei Chyuan and Ong, Seow Eng, Related Party Transactions and Firm Value: Evidence from Property Markets in Hong Kong, Malaysia and Singapore (April 12, 2016). Journal of Real Estate Finance and Economics, Vol. 52, No. 4, 2016, Available at SSRN: https://ssrn.com/abstract=2763704

David H. Downs

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate ( email )

Richmond, VA 23284-4000
United States

The Kornblau Institute ( email )

Richmond, VA 23284-4000
United States

Joseph T. L. Ooi

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore

Woei Chyuan Wong (Contact Author)

Universiti Utara Malaysia ( email )

Malaysia

Seow Eng Ong

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore
01-65-6516-3552 (Phone)
01-65-6774-8684 (Fax)

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