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

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 RPTs 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 three 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 relies 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.