Related Party Transactions as a Governance Risk: Implications for the Cost of Capital

Abstract

This study examines the impact of related party transactions (RPTs) on the cost of capital among KOSPI and KOSDAQ-listed firms in South Korea. Using 14,277 firm-year observations from 2012 to 2020, we employ multivariate regression analysis to examine the relationship between RPT intensity and the weighted average cost of capital (WACC). We find a robust and positive association between RPT intensity and WACC, suggesting that capital markets perceive extensive intra-group transactions as a governance risk and a source of increased information asymmetry. This perception leads to a higher rate of returns by investors, thereby increasing the cost of both equity and debt financing. Our findings contribute to the literature on corporate governance and capital market efficiency by highlighting the role of RPTs as a key determinant of financing costs. These insights underscore the importance of implementing stronger disclosure requirements and enhancing monitoring mechanisms to mitigate potential agency problems arising from intra-group transactions in emerging markets.