Recent accounting scandals have raised considerable concern among regulators, accounting community and scholars about related party transactions (RPTs). RP dealings among affiliates could impact the reliability of financial information both in terms of representational faithfulness and reliability of reported amounts. Although RPTs are formally disclosed in the footnotes of financial statements, outside information users have not access to the details and have difficulty in fully understanding their impact on the reliability of accounting information. This study examines the relationship between  corporate governance quality, level of RPTs, and firm value. Corporate governance quality is operationalized as the governance scores annually compiled by the Korea Corporate Governance Service from 2003 to 2005. This study examines the relationship between corporate governance quality, the ratio of RPTs such as sale of goods, credit offering, and loans engaging among the affiliates of listed companies, and firm value.
 

We generally find that firms with stronger shareholder rights engage in less RPTs such as sale of goods and credit offering, and that whether the large Chaebul firms have been closely regulated by the Korea Fair Trade Commission (FTC) or not does not affect such results. In addition, we find that while excess RPTs such as offering of credit (accounts receivables) to the affiliates associated with poor governance quality  have unexpected positive effect on the firm value, excess lending of funds to the affiliates have negative effect. We also report that the large Chaebul group firms monitored strongly by the Korea FTC suffer from the decline of firm value attributed to the excess sale of goods and offering of credit associated with poor governance quality. Lastly, we provide some evidence that all of the predicted excess RPTs attributable to poor governance quality is not negatively associated with future operating cash flows. This study report that the large Chaebul group firms suffer from the decline of firm value owing to the excess sale of goods and offering of credit associated with poor governance quality even if such RPTs do not decrease the future operating performance.  This results imply that the Chabul group firms need to disclose more information about RPTs positively to prevent such RPTs negative impact on the firm value.