Are Related-Party Sales Value-Adding or Value-Destroying? Evidence From China

Journal of International Financial Management & Accounting 26:1 2015
Are Related-Party Sales Value-Adding or

Value-Destroying? Evidence from China
Raymond M. K. Wong
Department of Accountancy, City University of Hong Kong, Tat Chee Avenue, Kowloon
Tong, Hong Kong
e-mail: [email protected]
Jeong-Bon Kim
Department of Accountancy, City University of Hong Kong, Tat Chee Avenue, Kowloon
Tong, Hong Kong
Agnes W. Y. Lo
Department of Accountancy, Lingnan University, Tuen Mun, Hong Kong
Abstract
Prior literature provides mixed and relatively little evidence on the economic conse-
quences of related-party transactions. We examine a hitherto underexplored issue of
whether transactions among firms within the same business group increase or reduce
firm value. Using a large sample of Chinese listed firms, we find that related-party sales
increase firm value. However, this value enhancement disappears for firms with (i) large
percentage of parent directors, (ii) high government ownership, or (iii) tax avoidance
incentives that often couple with management’s rent extraction activities. Although we
find that intragroup sales improve firm value in general, we also find that corporate
insiders use intragroup sales to deprive value from minority shareholders. Overall, our
findings highlight the interplay between ownership structure and tax avoidance incen-
tives in determining the economic consequences of related-party transactions.
1. Introduction
A number of well-publicized accounting scandals around the world,
such as the Enron failure (USA), the Pfizer Laboratories case (Paki-
stan), the BAT-Yava case (Russia), and the Greencool case (China),
We are especially grateful to the editor (Sidney Gray) and the anonymous referee for their
insightful and constructive suggestions. We also thank Michael Firth, Clive Lennox, and semi-
nar participants at the 36th EAA Annual Congress at Paris for their helpful comments, discus-
sions, and suggestions on earlier drafts of the paper. This research has benefited from financial
support from the Lingnan University, Hong Kong. Raymond Wong (corresponding author)
acknowledges the financial support of a grant from the Research Grants Council of the Hong
Kong Special Administrative Region, China (Project No. CityU 195513). All remaining errors
and omissions are our own.
© 2015 John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
2 Raymond M. K. Wong, Jeong-Bon Kim and Agnes W. Y. Lo
reveal that firms engage in related-party transactions (RPTs) to oppor-

tunistically manage earnings for financial reporting purposes or to tun-
nel profits to their controlling shareholders at the expense of minority
shareholders. Stated another way, this anecdotal evidence suggests that
RPTs are used as a means for controlling shareholders and manage-
ment to extract private control benefits at the expense of outside
minority shareholders. Conversely, the fact that laws do not prohibit
RPTs suggests that RPTs are normal business practices in that within-
group transactions serve as a common means for normal business
operations and resource allocation among affiliated firms within the
same business group. While large business groups play an important
role in emerging economies in Asia, as well as in many Western Euro-
pean countries, prior research has paid relatively little attention to the
economic consequences of within-group business transactions or RPTs
and in particular, their impacts on firm performance or the market
value of the firm. As a result, the question of whether and how RPTs
affect firm valuation remains contentious and unresolved.
Related-party transactions can be value-destroying if they are used
as a means for managerial opportunism, such as opportunistic earnings
management, and tunneling and expropriation of wealth from share-
holders. More specifically, under certain conditions RPTs can allow
controlling owners and corporate executives of a listed company to earn
private control benefits: RPTs can be used as a means to expropriate
corporate wealth from outside minority shareholders to controlling
shareholders and corporate executives (OECD, 2009). For example,
shifting profits from listed companies to non-listed parent companies or
non-listed privately owned companies may result in decreased profit
attributable to the outside shareholders of listed companies. Jian and
Wong (2010) find that Chinese firms prop up their related-party sales to
meet earnings targets as stipulated by the regulators,1 and simulta-
neously to divert profits to their controlling owners. Kim and Yi (2006)
show that Korean firms affiliated with a large business group provide
controlling shareholders with more incentives and opportunities for
opportunistic earnings management than independent firms. Their find-
ing suggests that intragroup transactions are used as a means for oppor-
tunistic earnings management, particularly for the benefit of controlling
shareholders. Other studies have also shown that corporate insiders can
make use of related-party sales as a mechanism to manipulate profit
statements for maximizing their compensation or to obfuscate their
manipulative practices (Lo et al., 2010a; Kim et al., 2011).
© 2015 John Wiley & Sons Ltd
Are Related-party Sales Value-Adding or Value-Destroying 3
Although prior accounting scandals and literature suggest that

RPTs are used for opportunistic earnings management and tunneling,
RPTs are a natural part of business as well. In fact, firms can exhibit a
high volume of such transactions even when they do not engage in
opportunistic earnings management and/or accounting and financial
fraud (Gordon et al., 2007). Djankov et al. (2008) point out the fact
that no country completely prohibits RPTs: This suggests that at the
country level, the benefits from allowing RPTs are likely to be greater
than the associated costs and that at the firm level, RPTs could
enhance firm’s operating efficiency. For example, some companies can
benefit from RPTs by making strategic investments in joint ventures
such that they can obtain and secure access to supplies or markets and
to reduce their business risk (Kohlbeck and Mayhew, 2010).
Despite the conflicting arguments on the purposes of RPTs, there is
little direct evidence on the impacts of RPTs on firms’ value (Ryngaert
and Thomas, 2012). Even though some studies examine the economic
consequences of RPTs, their findings are mixed. For example, Kohl-
beck and Mayhew (2010) find that investors respond negatively to the
disclosure of related-party loans and guarantees one year before the
enforcement of the 2002 Sarbanes-Oxley Act. In a related vein, Cheung
et al. (2006) find that minority shareholders of Hong Kong listed firms
experience large value losses at the announcement of connected trans-
actions during 1998–2000. These two studies suggest that investors
react negatively on the disclosure of RPTs. However, Buysschaert
et al. (2004) find that market reacts positively to the announcement of
intragroup equity sales in Belgian companies. Using an Indian sample
of listed firms, Khanna and Palepu (2000) find that firms affiliated with
a corporate group perform better than non-affiliated companies, sug-
gesting that corporate group affiliation is associated with better
resource allocation among affiliated firms. Although Khanna and
Palepu’s (2000) study does not address the impacts of RPTs directly,
their results are consistent with the argument that internal transactions
within the same business group help group-affiliated companies
improve their performance, because of the greater trust established
and the lower information asymmetry achieved through transactions
with related-parties than those with non-affiliated companies.
Although we cannot directly compare the above results as these
studies investigate different types of RPTs in different countries, the
inconclusive evidence is not surprising given the complicated nature of
RPTs and possible contradictory impacts of different types of RPTs
on firm value. Therefore, our study aims to provide an in-depth analy-

sis on whether related-party sales transactions enhance or reduce the
market value of the firm. We examine our research issues using a sam-
ple of Chinese listed firms, because China’s institutional environment
provides us with a unique and rich setting. In China, RPTs are very
prevalent, where the sale of goods and services among related parties
is the most commonly conducted transactions by the Chinese listed
companies. Historically, China’s state-owned enterprises (SOEs) have
often relied on internal product markets for their product sales or
input supplies (e.g., materials and labor) and on internal capital mar-
kets for financing, in particular, prior to initial public offerings (IPOs).
Before going public, these SOEs, typically production units or factories
under direct control of the central or local governments, are carved
out and undergo the corporatization process by issuing shares. After
carve-outs and corporatization, certain corporatized units (which meet
the listing requirements) are listed on the Shanghai or Shenzhen stock
exchanges via IPOs. In the post-IPO period, these listed subsidiaries
tend to engage frequently in RPTs with their parent SOEs and other
subsidiaries that are controlled by the same SOEs (Jian and Wong,
2010; Lo et al., 2010b). As Jian and Wong (2010) report, more than
50 per cent of Chinese listed firms are involved in related-party sales
to some extent. The sales of goods and services are recurring activities,
where the manipulation via sales of goods and services is less likely to
be detected. We believe that the considerable volume of RPTs in China
and its manipulative nature increase the power of our tests of examin-
ing the economic consequences of RPTs. Our first objective is thus to
investigate whether related-party sales transactions2 by Chinese listed
companies are value-adding or value-destroying.
The second objective of this study is to investigate whether and how
the influence or power of controlling shareholders affects the value of
RPTs. The control power of controlling shareholders and management
is an important factor affecting the decisions on RPTs in China. As
mentioned previously, many Chinese listed companies are originally
spun off from unlisted parent companies prior to their own listing. As
a result, their parent SOEs remain as important controlling sharehold-
ers, retain significant control via high voting rights, and exercise a sig-
nificant influence over their listed subsidiaries even after IPOs (Ding
et al., 2007; Berkman et al., 2010; Lo and Wong, 2011). For example,
Gul et al. (2010) report that during their sample period of 1996–2003,
the largest shareholder in Chinese listed firms holds about 32 per cent
of shares outstanding, and about 67 per cent of the largest sharehold-

ers are the government. It is also common that parent SOEs often dis-
patch directors to listed subsidiaries to exercise their control rights.
Highly concentrated ownership with the controlling shareholders (usu-
ally the government), along with significant influence of the “parent
directors” (i.e., directors who are representatives of the parent compa-
nies of the listed firms), increases incentives and opportunities for tun-
neling or income shifting via related-party sales in China (Lo et al.,
2010a,b). Such tunneling helps the controlling shareholders camouflage
their extraction of private control benefits from outside minority share-
holders, which usually brings about losses to the latter shareholders
(Liu and Lu, 2007). Although the influence or power of controlling
shareholders in affecting the decision on RPTs is documented in prior
literature, evidence is scarce about its moderating impacts on the rela-
tion between RPTs and firm value. Therefore, our analyses focus on
whether the impact of related-party sales on firm valuation differs sys-
tematically for firms with high government ownership compared to
those with low government ownership, and for firms with a large per-
centage of parent directors on the board compared to those with a
small percentage.
Finally, we also investigate how taxes affect the association between
RPTs and firm value. Prior research shows that group companies
make use of intragroup transactions to achieve tax savings based on
the tax rate differentials between jurisdictions or within a jurisdiction
(Harris, 1993; Cravens and Shearon, 1996; Jacob, 1996; Oyelere and
Emmanuel, 1998; Conover and Nichols, 2000; Gramlich et al., 2004;
Lo et al., 2010b). Tax planning opportunities also exist for companies
that are subject to tax rate changes across time (Guenther, 1994; Lo
et al., 2010c). For example, firms can shift profits out from a year with
a tax rate increase for tax savings. Despite the tax savings, this tax
planning activity can also be used as an excuse for management to
tunnel profits out from the listed company to its parent company or
other related company.3 By the same token, firms can shift profits into
a year with a tax rate reduction for tax savings, but they can also use
tax planning as a means to prop up income to hide bad news. A num-
ber of recent studies argue and find that firm value is negatively
affected by corporate tax avoidance and planning activities. This is
because tax avoidance and planning activities are usually coupled with
managerial rent extraction activities, such as earnings management and
related-party transactions, because the latter activities provide tools,
masks, excuses, and justifications for the former activities or vice versa
(Desai and Dharmapala, 2006, 2009; Desai et al., 2007; Kim et al.,
2011). To provide empirical evidence on the role of taxes in determin-
ing the effect of RPTs on firm value, our analyses focus on whether
related-party sales transactions have different impacts on firm valua-
tion when tax rates change.
Using a sample of 4,520 Chinese listed firms during the period of
2002–2009, we find that the value of the firm4 is positively associated
with the abnormal level of related-party sales transactions (i.e., the in-
tragroup sales above and beyond the normal level),5 but the associa-
tion is less pronounced for firms with large percentage of parent
directors and those with high government ownership. The findings are
robust to controlling for various firm characteristics (namely size, firm
age, tax rate, leverage, liquidity, growth, and profitability) as well as
the firm and year fixed effects.
Put differently, our results support the view that RPTs are generally
used as a tool for improving resource allocation efficiency among affili-
ated firms within the same business group, thereby increasing firm
value. However, in an environment where controlling shareholders
and/or parent companies are able to exercise a significant influence
over minority shareholders and/or listed subsidiaries, RPTs are likely
to serve as a means to divert corporate resources from the latter to the
former. In this environment, RPTs are thus likely to be value-destroy-
ing rather than value-adding. More specifically, our results are in line
with the view that firms with a large percentage of parent directors
and high government ownership are more likely to tunnel profits out
to prop up their related (low-profit or loss-making) companies via
related-party sales transactions. Because of this tunneling activity, a
negative impact of RPTs on the market value of the tunneled company
offsets or exceeds the associated positive effect mentioned above.
For the effect of corporate tax avoidance incentives, we find that
the positive association between abnormal related-party sales and firm
value becomes weakened for firms that are subject to a tax rate
increase or a tax rate decrease. These results suggest that the value-
destroying effect of RPTs associated with non-tax incentives (e.g.,
managing earnings upward to hide bad news or tunneling profits out
for the benefits of controlling shareholders) appears to outweigh the
value-adding effect of RPTs associated with tax-saving incentives.
Therefore, although firms with abnormally high related-party sales
transactions are associated with higher firm value in general, the firm
value enhancement associated with RPTs tends to be reduced by cor-

porate tax avoidance and planning activities because these activities
facilitate managerial opportunistic rent extraction.
Our study contributes to existing research in several ways. First, to
the best of our knowledge, our study is the first to examine whether
and how the value of RPTs is influenced by the largest controlling
shareholder of unlisted parent company (or the government) via parent
directors’ participation and through concentrated ownership with the
largest shareholder—typically the government. Second, our study pro-
vides evidence that helps explain and reconcile reasons why prior
research documents mixed, albeit limited, evidence about the valuation
effect of RPTs.6 We provide new evidence that the positive impact of
related-party sales transactions on firm value is mitigated by the influ-
ence of the largest shareholder. This influence is typically exercised via
the concentrated ownership with the largest controlling shareholder of
unlisted parent company or the appointment of parent directors to
listed subsidiaries. Finally, we provide existing and potential investors
with new insights into the unintended impact of corporate tax planning
on the valuation of related-party sales transactions. Stated another
way, our study helps us better understand the tax and non-tax factors
that influence the decision to make internal resources allocations via
RPTs.
The remainder of the paper proceeds as follows: Section 2 describes
the sample, research design and explains how controlling shareholders
and tax planning activities might affect the association between
related-party sales and firm value; Section 3 discusses the results; Sec-
tion 4 provides further tests on the association between abnormal
returns and related-party sales transactions and discusses sensitivity
tests; and Section 5 concludes the paper.
2. Data and Research Design

Our initial sample is comprised of all of the companies that are listed
on the Shanghai Stock Exchange during 2002–2009, excluding financial
institutions and utilities companies. We also exclude those firms with
missing data for any year in the sample period. Related-party sales
and ownership data are collected from the China Stock Market and
Accounting Research (CSMAR) related-party transaction database.
We hand-collect data on the statutory tax rate7 and the ultimate share-
holders of the listed companies as it applies to each firm in our sam-
ple.8 All other financial data are extracted from the CSMAR general
research database. The final sample that meets all our criteria consists
of 4,520 firm-year observations (565 firms).
2.1. Firm Value and Related-Party Sales

As mentioned previously, prior studies show inconclusive evidence
about the impact of RPTs on firm valuation or the market value of
the firm. To test whether related-party sales have positive or negative
impacts on firm value, we estimate the following regression:
Qi;t ¼ a0 þ a1 ABN RPTi;t þ a2 SIZEi;t þ a3 AGEi;t þ a4 TAXi;t

þ a5 DEBTi;t þ a6 LIQUIDi;t þ a7 BMi;t þ a8 ROAi;t þ a9 BLOCKi;t
þ ðYear DummiesÞ þ ðFirm DummiesÞ þ e ð1Þ
In the above, the dependent variable, Qi,t, represents industry-

adjusted Tobin’s Q and is measured by the ratio of the market value
of assets divided by the book value of total assets minus the industry
average ratio. Following previous research (Berkman et al., 2009; Fang
et al., 2009; Kim and Lu, 2011), we measure the market value of assets
by the market value of common equity plus the book value of total
liabilities minus balance sheet deferred tax assets. The test variable,
ABN_RPTi,t, represents the abnormal portion of a firm’s related-party
sales transactions. We define related-party sales transactions as the
sales of goods and services among related companies. Cheung et al.
(2006) and Berkman et al. (2010) suggest that companies carry out dif-
ferent related-party activities to expropriate resources from minority
shareholders that include purchase or sale of assets, purchase or sale
of goods and services, sale of equity, and cash payment to related
companies. Among these related-party activities, the sale of goods and
services is the most commonly conducted transactions by the Chinese
listed companies. Unlike the sales of fixed assets or equity, the sales of
goods and services are recurring activities, where the manipulation via
sales of goods and services is less likely to be detected (Jian and Wong,
2010). Following prior studies (Jian and Wong, 2010; Lo et al.,
2010a), our analyses focus on related-party sales transactions in China
rather than other types of RPTs.

Given the nature of business and industry structures, a firm can

engage in related-party sales transactions as part of its normal business
operations. In such a case, firm management does not have discretion
over the volume of related-party sales. However, related-party sales can
also be discretionary or abnormal. The magnitude of a firm’s involve-
ment in abnormal related-party sales is influenced by a variety of factors,
including the extent of a firm’s tax avoidance and planning activities, the
demand for internal resources allocation among affiliated firms or
subsidiaries, earnings management incentives, and profit expropriation
activities. Similar to Jian and Wong (2010), we decompose total related-
party sales into normal and abnormal parts. For this purpose, for each
sample year, we regress RPTi,t (measured by a firm’s related-party sales,
scaled by the total assets) against SIZEi,t (measured by the natural log of
total assets), DEBTi,t (measured by the total debt-to-asset ratio), BMi,t
(measured by the ratio of book value to market value of equity), and
industry fixed effects. We measure abnormal related-party sales
(ABN_RPTi,t) using the residual of the above regression.9
In equation (1), we include several control variables that are known
to affect Tobin’s Q. Following prior studies (Gompers et al., 2003;
Fang et al., 2009), we include SIZEi,t (as defined earlier) and AGEi,t (as
measured by the natural log of a firm’s age since listing).10 As firms in
China are subject to different statutory tax rates based on the preferen-
tial tax policies they are entitled to,11 we include a firm’s statutory tax
rate, TAXi,t, as one of the control variables. Firms that are subject to a
lower tax rate are likely to have higher levels of cash flow, and thus
higher firm value, all else being equal. Also, previous research shows
that leverage, liquidity, growth, and profitability will affect firm value
(Chang and Hong, 2000; Doidge et al., 2004; Lang et al., 2004). As
such, we include DEBTi,t (as defined earlier), LIQUIDi,t (measured by
the current-to-total debt ratio), BMi,t (as defined earlier), and ROAi,t
(measured by the return on assets ratio) as additional controls. We also
include BLOCKi,t (measured by the sum of percentage of shareholdings
of the second to the tenth largest shareholders) as one of the control
variables (Berkman et al., 2009). Finally, we include Year Dummies and
Firm Dummies to control for year and firm fixed effects.
2.2. Influence of Controlling Shareholders

As mentioned earlier, controlling shareholders can have significant
impacts on the sensitivity of firm value to RPTs. In China, many listed
companies are spin-offs of the profitable units of SOEs since the eco-
nomic reform of the 1990s (Green, 2003; Chow, 2007). After the spin-
offs, SOEs retain the unprofitable units of the business as well as the
social activities (e.g., hospitals, schools, etc.), whereas the profitable
units are listed on the stock exchanges. The unlisted parent SOE
requires resources from the listed firms so that the poor-performing
divisions and non-revenue generating units of the SOE can survive
(Wu, 2005; Ding et al., 2007). These unlisted parents are likely to
appoint some of their own executives as the directors of their newly
listed subsidiary so that they can exercise influence on the corporate
decisions such as the decisions on RPTs (Lo et al., 2010a). In most
cases, these so-called parent directors are not paid directly by the listed
companies, but are instead paid by the unlisted parent companies. As
such, parent directors may take instructions from, and act for the ben-
efit of, the parent company at the expense of the minority shareholders
of the listed companies. For example, Lo et al. (2010a) find that firms
with a high percentage of parent directors are more likely to shift prof-
its from the listed companies to their parent companies via related-
party sales transactions than are firms with a low percentage of parent
directors.
Another way to maintain substantial influence over the listed spin-
off firm is via a significant ownership by the unlisted SOE (Ding et al.,
2007). Indeed, many of Chinese listed companies are still owned by the
original unlisted parent SOEs (Wu, 2005; Walter and Howie, 2006).
This ownership structure unique to China exerts a significant influence
over management’s business decisions (Wang et al., 2008; Jian and
Wong, 2010). Lo et al. (2010b) find that the higher the percentage of
shares owned by the parent SOEs, the higher the transfer pricing
manipulation for shifting profits out from the listed companies. Apart
from the parent director’s appointment, we therefore expect that the
percentage of shares owned by the parent companies should have sig-
nificant impacts on the association between firm value and related-
party sales transactions. On the other hand, despite the negative influ-
ences caused by the controlling owners, controlling shareholders such
as unlisted parent companies or the government may have superior
information and better knowledge of the parent company and its
subsidiaries. As such, the ownership concentration with controlling
shareholders and/or the presence of parent directors may indeed help
the listed affiliated companies improve the monitoring efficiency as well
as the internal resource allocation efficiency in relation to related-party
sales transactions. Given the above conflicting arguments, the direc-

tional effect of the concentrated ownership and parent directorship on
the value of related-party sales transactions is an empirical question.
This study therefore aims to provide empirical evidence on this inter-
esting, but under-researched, issue.
To test the influence of parent directors on the value of RPTs, we
include a dummy variable, P_DIR_HIGHi,t, and its interaction term
with ABN_RPTi,t in equation (1). Similarly, to test the influence of
government ownership on the value of RPTs, we include another
dummy variable, GOV_HIGHi,t, and its interaction term with
ABN_RPTi,t in equation (1). We then estimate the following regres-
sions:
Qi;t ¼ a0 þ a1 ABN RPTi;t þ a2 P DIR HIGHi;t ABN RPTi;t

þ a3 P DIR HIGHi;t þ a4 SIZEi;t þ a5 AGEi;t þ a6 TAXi;t
þ a7 DEBTi;t þ a8 LIQUIDi;t þ a9 BMi;t þ a10 ROAi;t
þ a11 BLOCKi;t þ ðYear DummiesÞ þ ðFirm DummiesÞ þ e ð2Þ
Qi;t ¼ a0 þ a1 ABN RPTi;t þ a2 GOV HIGHi;t ABN RPTi;t

þ a3 GOV HIGHi;t þ a4 SIZEi;t þ a5 AGEi;t þ a6 TAXi;t
þ a7 DEBTi;t þ a8 LIQUIDi;t þ a9 BMi;t þ a10 ROAi;t
þ a11 BLOCKi;t þ ðYear DummiesÞ þ ðFirm DummiesÞ þ e ð3Þ
In equation (2), P_DIR_HIGHi,t is equal to 1 if the percentage of

parent directors of a firm is higher than the median in all the years
during the sample period, and 0 otherwise. In equation (3), GOV_-
HIGHi,t is equal to 1 if the percentage of government ownership of a
firm is higher than the median in all the years during the sample per-
iod and 0 otherwise. The main variables of interests in the two
regressions are the interaction terms of P_DIR_HIGHi,t*ABN_RPTi,t
and GOV_HIGHi,t *ABN_RPTi,t where any significant coefficient rep-
resents the moderating impacts of controlling shareholders’ influences
on the association between related-party sales and firm value.
Besides, to further verify the influence of controlling shareholders on
the value of RPTs, we partition our sample firms into (i) firms with
a large percentage of parent directors (P_DIR_HIGHi,t) versus firms
with a small percentage of parent directors (P_DIR_LOWi,t) and (ii)
firms with high government ownership (GOV_HIGHi,t) versus firms
with low government ownership (GOV_LOWi,t).12 In so doing, we
classify a firm as having a large (small) percentage of parent directors

if its percentage of parent directors was above (below) the median in
all the years during the sample period. Similarly, we classify a firm
as having high (low) government ownership if its government owner-
ship is above (below) the median in all the years during the sample
period.13 We then re-estimate equation (1) for each partitioned sub-
sample.
2.3. Influence of Corporate Tax Avoidance Incentives

Corporate tax rate is another important factor that influences corpo-
rate strategy in general and tax planning policy in particular, as it
directly affects a firm’s cash flow and thus firm value. Therefore, we
investigate whether and how the impact of related-party sales transac-
tions on firm value is differentially affected by corporate tax planning
activities driven by tax rate changes. Prior studies find that the major
objective of corporate tax avoidance and planning policies can be
achieved by related-party sales transactions (e.g., Lo et al., 2010b).
Besides, corporate groups can reduce their overall tax liabilities by
shifting profits from a period paying high tax rates to a period paying
low tax rates (Guenther, 1994; Lo et al., 2010c).
In China, the government offers listed firms various forms of tax
incentives and tax reductions, and these incentives vary across loca-
tion, industry, and form of investment. Therefore, Chinese listed firms
face tax rate changes when their preferential tax policies expire or
when they are entitled to new tax concession policies. Some Chinese
listed firms also encounter a tax rate change in 2008 owing to the
introduction of the 2008 Enterprise Income Tax Law.14 Firms can take
advantage of the tax rate change for tax savings by shifting profits into
the period with a tax rate reduction or shifting profits out from the
period with a tax rate increase. On the one hand, these tax-minimizing
activities should normally help listed affiliates improve their cash flow
performance and thus firm value. On the other hand, one may also
expect that corporate managers can take advantage of the tax rate
changes for their own private benefits by excessively engaging in tax
avoidance and planning activities. For example, Desai et al. (2007)
suggest that a higher tax rate increases the return to “theft” by insid-
ers. Desai and Dharmapala (2009) find that the (positive) value of tax
planning activities will be offset by increased opportunities for rent
diversion provided by tax shelters. Kim et al. (2011) find that corpo-
rate tax avoidance is positively associated with firm-specific stock price

crash risk and suggest that tax avoidance creates managerial incentives
to camouflage unfavorable information about a firm’s future prospect.
As such, firms may use related-party sales transactions as a means to
cover up rent diversion facilitated by the aggressive tax avoidance and
planning policy.
To summarize, if related-party sales transactions are used as a pri-
mary vehicle for opportunistic earnings management to cover up tax
avoidance activities in response to a tax rate change, we expect
related-party sales to have a negative impact on firm value. Conversely,
if related-party sales are used purely for the purpose of tax minimiza-
tion, it should have a positive impact on firm value. It is therefore
interesting to examine the question of whether a tax rate change leads
to a positive or negative impact on firm value via RPTs. To test this
unexplored question, we include two dummy variables, TAXINi,t and
TAXDEi,t, and their interaction terms with ABN_RPTi,t in equa-
tion (1). We then estimate the following regression:
Qi;t ¼ a0 þ a1 ABN RPTi;t þ a2 TAXINi;t ABN RPTi;t þ a3 TAXDEi;t

ABN RPTi;t þ a4 TAXINi;t þ a5 TAXDEi;t þ a6 SIZEi;t
þ a7 AGEi;t þ a8 TAXi;t þ a9 DEBTi;t þ a10 LIQUIDi;t þ a11 BMi;t
þ a12 ROAi;t þ a13 BLOCKi;t þ ðYear DummiesÞ þ ðFirm DummiesÞ
þe ð4Þ
In equation (4), TAXINi,t is an indicator variable that is equal to 1

if the tax rate in the current year is higher than the tax rate in the pre-
vious year, and 0 otherwise. TAXDEi,t is an indicator variable that is
equal to 1 if the tax rate in the current year is smaller than the tax rate
in the previous year, and 0 otherwise. Any significant coefficient on the
interaction terms of TAXINi,t*ABN_RPTi,t and TAXDEi,t*ABN_RPTi,
t signifies the influences of corporate tax avoidance incentives on the
association between related-party sales and firm value. Further, we
also examine the importance of tax rate changes on the value of RPTs
by partitioning our sample firms into (i) firms with a tax rate increase
(TAXINi,t), (ii) firms with a tax rate decrease (TAXDEi,t), and (iii)
firms with no tax rate change. We then re-estimate equation (1) for
each partitioned subsample. Table 1 summarizes the definitions of all
the variables used in our empirical tests.

3. Empirical Results
3.1. Descriptive Statistics
Table 2 reports the descriptive statistics for our total sample of 4,520
observations over the period of 2002–2009. As shown in Table 2,
industry-adjusted Tobin’s Q, denoted by Qi,t, has the mean (median)
of 0.150 (0.140) with its standard deviation of 1.426, suggesting that
its distribution is skewed. The test variable, ABN_RPTi,t, has the mean
(median) of 0.003 (0.027) with its standard deviation of 0.155. The
mean P_DIR_HIGHi,t of 0.209 indicates that about 21 per cent of
firms have more parent directors than the sample median in all years
during the sample period, while the mean GOV_HIGHi,t of 0.368 indi-
cates that nearly 37 per cent of firms have government ownership that
is higher than the sample median in all sample years. The mean and
median of SIZEi,t are 21.476 and 21.362 with its standard deviation of
1.118, suggesting that while the distribution appears to be approxi-
mately normal, its variation is relatively narrow, reflecting the fact that
listed firms in China consist of relatively large firms during the sample
period. The mean of AGEi,t is 2.105, which implies that the average
listing age of firms is around 8.2 years, reflecting a short history of
China’s stock markets. The mean and median of statutory tax rate for
firms (TAXi,t) are 22.9 and 25 per cent, respectively. The mean and
median of DEBTi,t are 0.521 and 0.517, respectively, suggesting that
more than half of the total assets of the listed companies are financed
by debt. The liquidity (LIQUIDi,t) of the sample firms is quite high
with the mean and median of 0.845 and 0.918, respectively. Lastly, the
mean of book-to-market equity ratio (BMi,t), return on assets (ROAi,t),
and block ownership (BLOCKi,t) are 0.485, 0.021, and 0.173, respec-
tively.
3.2. Firm Value, Related-Party Sales, and Controlling Shareholders’

Influence
As illustrated in Figure 1, the overall value of the firm, captured by
industry-adjusted Tobin’s Q, increases with a firm’s involvement in
abnormal related-party sales transactions. For the entire sample
period, we first sort firms annually into ten deciles based on their
abnormal related-party sales (ABN_RPTi,t) and then compute indus-
try-adjusted Tobin’s Q (Qi,t) for firms that belong to each decile. As

Table 1. Variable Definitions

Variable Definition
Qi,t Industry-adjusted Tobin’s Q. Tobin’s Q is measured by market
value of assets divided by the book value of total assets.
Market value of assets is measured by market value of
common equity plus the book value of total liabilities minus
balance sheet deferred tax assets.
RPTi,t Related-party sales of the firm, scaled by total assets.
ABN_RPTi,t Abnormal related-party transactions of the firm. We follow Jian
and Wong’s (2010) model to regress, year-to-year, RPT
(measured by a firm’s related-party sales, scaled by the total
assets) against SIZE (measured by the natural log of total
assets), DEBT (measured by the total debt-to-asset ratio), BM
(measured by the book-to-market equity ratio), and industry
fixed effects. The residual term of the regression model refers to
abnormal related-party sales transactions.
SIZEi,t Natural log of total assets of the firm.
AGEi,t Natural log of the firm’s age since listing.
TAXi,t Statutory tax rate of the firm.
DEBTi,t Total debt over total assets of the firm.
LIQUIDi,t Current liabilities over total liabilities of the firm.
BMi,t Book-to-market equity ratio of the firm.
ROAi,t Return on assets of the firm.
BLOCKi,t Sum of the percentage of shareholdings of the second to the
tenth largest shareholders.
P_DIR_HIGHi,t Equal to 1 if the percentage of parent directors of a firm is
higher than the median in all the years during the whole
sample period; 0 otherwise.
P_DIR_LOWi,t Equal to 1 if the percentage of parent directors of a firm is
lower than the median in all the years during the whole sample
period; 0 otherwise.
GOV_HIGHi,t Equal to 1 if the percentage of government ownership of a firm
is higher than the median in all the years during the whole
GOV_LOWi,t Equal to 1 if the percentage of government ownership of a firm
is lower than the median in all the years during the whole
TAXINi,t A dummy variable that is equal to 1 if the tax rate in the
current year is higher than the tax rate in the previous year;
and 0 otherwise.
TAXDEi,t A dummy variable that is equal to 1 if the tax rate in the
current year is lower than the tax rate in the previous year; and
0 otherwise.
ARi,t Size-adjusted abnormal return, measured from the beginning of
the fourth month of the current year to the end of the third
month of the following year.
depicted in the figure, firm value is, overall, positively related to the
extent of a firm’s involvement in related-party sales: Although only
suggestive of the underlying relation between the two, Figure 1 clearly
Table 2. Summary Statistics

Variable Mean Std. D 5% 25% 50% 75% 95%
Qi,t 0.150 1.426 1.120 0.480 0.140 0.410 2.230
RPTi,t 0.046 0.139 0.000 0.000 0.002 0.028 0.240
ABN_RPTi,t 0.003 0.155 0.084 0.055 0.027 0.004 0.180
SIZEi,t 21.476 1.118 19.931 20.741 21.362 22.074 23.411
AGEi,t 2.015 0.553 0.693 1.792 2.079 2.398 2.708
TAXi,t 0.229 0.088 0.150 0.150 0.250 0.330 0.330
DEBTi,t 0.521 0.226 0.198 0.379 0.517 0.644 0.837
LIQUIDi,t 0.845 0.189 0.430 0.773 0.918 0.988 1.000
BMi,t 0.485 0.350 0.095 0.256 0.423 0.646 1.086
ROAi,t 0.021 0.084 0.099 0.008 0.026 0.051 0.107
BLOCKi,t 0.173 0.130 0.016 0.061 0.145 0.269 0.415
P_DIR_HIGHi,t 0.209 0.407 0.000 0.000 0.000 0.000 1.000
P_DIR_LOWi,t 0.177 0.382 0.000 0.000 0.000 0.000 1.000
GOV_HIGHi,t 0.368 0.482 0.000 0.000 0.000 1.000 1.000
GOV_LOWi,t 0.343 0.475 0.000 0.000 0.000 1.000 1.000
This table presents firms characteristics for our sample of 4,520 firm-year observations from
2002 to 2009. Our sample comprises all companies that are listed on the Shanghai Stock
Exchange during 2002–2009, excluding financial institutions and utilities companies. We also
exclude those firms with missing data for any year in the sample period. Definitions of all
variables appear in Table 1.
illustrates an overall trend that firm value increases with the level of
abnormal related-party sales transactions.
Table 3 reports the results of regression in equation (1) for the
sample (n = 4,520). The results are based on standard errors cor-
rected for firm-level clustering. As shown in the table, the coefficient
on our variable of interest, ABN_RPTi,t, is positively significant
(t = 2.914). The control variables, SIZEi,t and BMi,t, are negative
and significant at the 1 per cent level, whereas AGEi,t and BLOCKi,t
are positively significant at the 1 per cent level. In short, the results
reported in Table 3 clearly indicate that firms with higher abnormal
related-party sales are associated with higher firm value, all else
being equal. This finding is in line with the view that related-party
sales transactions are used as a tool for improving intragroup
resource allocation efficiency rather than as a tool for rent-seeking
activities. As a result, on average, firm values increase with related-
party sales transactions.
Table 4 presents descriptive statistics on our research variables
included in our regression models. In Panel A, we partition our total
sample into two subsamples with large and small percentages of parent
directors based on the median percentage. It shows that ABN_RPTi,t
Figure 1. Relation Between Firm Value and Abnormal Related-Party

Sales Transactions
This figure examines the relation between industry-adjusted Tobin’s
Q and the abnormal related-party sales. We sort firms annually into
ten deciles based on their abnormal related-party sales (ABN_RPT)
and then compute industry-adjusted Tobin’s Q (Q) for firms that
belong to each decile.
has the mean (median) value of 0.024 (0.019) for firms with large
percentage of parent directors (i.e., P_DIR_HIGHi,t = 1), whereas
ABN_RPTi,t has the mean (median) value of 0.015 (0.039) for firms
with small percentage of parent directors (i.e., P_DIR_LOWi,t = 1). In
Panel B, we partition our total sample into two subsamples with high
and low government ownership based on its sample median. We find
that ABN_RPTi,t has the mean (median) value of 0.020 (0.025) for
firms with high government ownership (i.e., GOV_HIGHi,t = 1),
whereas ABN_RPTi,t has the mean (median) value of 0.013 (0.031)
for firms with low government ownership (i.e., GOV_LOWi,t = 1).
Briefly, our results show that firms with higher influence of controlling
Table 3. Regression Results for the Value of Related-Party Sales Transac-

tions
Whole sample (n = 4,520)
Variable Coefficient t-statistic
Intercept 8.544 13.984***
ABN_RPTi,t 0.605 2.914***
SIZEi,t 0.332 10.841***
AGEi,t 0.075 2.429***
TAXi,t 0.288 1.502
DEBTi,t 0.081 0.531
LIQUIDi,t 0.022 0.264
BMi,t 1.439 12.732***
ROAi,t 0.656 0.659
BLOCKi,t 0.005 2.779***
YEAR Included
FIRM Included
Adjusted R-square 0.291***
This table examines whether abnormal related-party sales have positive or negative impacts
on firm value. The regression equation is as follows: Qi;t ¼ a0 þ a1 ABN RPTi;t þ a2 SIZEi;t
þ a3 AGEi;t þ a4 TAXi;t þ a5 DEBTi;t þ a6 LIQUIDi;t þ a7 BMi;t þ a8 ROAi;t þ a9 BLOCKi;t þ
ðYear DummiesÞ þ ðFirm DummiesÞ þ e
Definitions of all variables appear in Table 1. *** indicates significance at the 1% level (two-
tailed test). The t-statistics are based on standard errors adjusted for clustering on firms.
shareholders (i.e., large percentage of parent directors and high

government ownership) engage in more abnormal RPTs than firms
with lower influence of controlling shareholders. This finding is
broadly consistent with prior China studies that show that firms with
higher government ownership (in which the government is the largest
controlling shareholder) engage in more RPTs (Cheung et al., 2009;
Jian and Wong, 2010).
Panels A and B of Table 5 report the regression results of equa-
tions (2) and (3), respectively. We find that ABN_RPTi,t is positively
significant at the 1 per cent level in both Panels A and B, and the
interaction terms, P_DIR_HIGHi,t*ABN_RPTi,t (Panel A) and GOV_-
HIGHi,t*ABN_RPTi,t (Panel B), are negatively significant at the 5 and
10 per cent levels, respectively. These results suggest that the positive
impact of related-party sales on firm value is weaker for firms with a
large percentage of parent directors and a high government ownership.
Table 6 reports the regression results for the four partitioned director-
ship/ownership subsamples. For the subsample of firms with a low per-
centage of parent directors (i.e., P_DIR_LOWi,t = 1), we find that
ABN_RPTi,t is significantly positive at the 5 per cent level (Panel A).
Table 4. Descriptive Statistics for Firms with High/Low Percentage of

Parent Directors and Government Ownership
Panel A: Large versus small percentage of parent directors
Large percentage of parent Small percentage of parent

directors (P_DIR_HIGH; directors (P_DIR_LOW;
n = 944) n = 800)
Variable Mean Median Std. D Mean Median Std. D

Qi,t 0.196 0.110 1.392 0.014 0.170 1.006
ABN_RPTi,t 0.024 0.019 0.219 0.015 0.039 0.109
SIZEi,t 21.501 21.393 1.147 21.553 21.406 1.034
AGEi,t 2.091 2.197 0.526 1.961 2.079 0.561
TAXi,t 0.224 0.240 0.086 0.232 0.250 0.090
DEBTi,t 0.499 0.495 0.226 0.496 0.500 0.177
LIQUIDi,t 0.836 0.920 0.196 0.849 0.903 0.169
BMi,t 0.487 0.416 0.394 0.520 0.457 0.320
ROAi,t 0.022 0.028 0.085 0.029 0.032 0.063
BLOCKi,t 18.074 15.730 12.978 15.198 11.555 12.340
Panel B: High vs. low government ownership
High government ownership Low government ownership

(GOV_HIGH; n = 1,664) (GOV_LOW; n = 1,552)
Variable Mean Median Std. D Mean Median Std. D

Qi,t 0.069 0.141 1.154 0.184 0.129 1.535
ABN_RPTi,t 0.020 0.025 0.166 0.013 0.031 0.144
SIZEi,t 21.788 21.616 1.175 21.254 21.193 1.033
AGEi,t 1.946 2.079 0.566 2.041 2.197 0.548
TAXi,t 0.223 0.180 0.086 0.234 0.250 0.089
DEBTi,t 0.479 0.485 0.185 0.537 0.521 0.233
LIQUIDi,t 0.846 0.926 0.191 0.855 0.918 0.172
BMi,t 0.496 0.443 0.284 0.467 0.405 0.329
ROAi,t 0.034 0.032 0.056 0.015 0.026 0.102
BLOCKi,t 10.314 7.410 9.144 23.189 22.950 12.908
This table presents firms characteristics for four subsamples of firms with P_DIR_HIGH=1
versus P_DIR_LOW=1 (Panel A), and with GOV_HIGH=1 versus GOV_LOW=1 (Panel B).
Definitions of all variables appear in Table 1.
We find, however, that for the high-percentage subsample (i.e.,

P_DIR_HIGHi,t = 1), ABN_RPTi,t is insignificant. For the subsample
of firms with low government ownership (i.e., GOV_LOWi,t = 1),
ABN_RPTi,t is significantly positive at the 5 per cent level (Panel B).
However, for firms with high government ownership (i.e., GOV_-
HIGHi,t = 1), ABN_RPTi,t is insignificant.
Table 5. Regression Results for the Impact of Controlling Shareholders on

the Value of Related-Party Sales Transactions
Panel A:
Intercept 8.526 14.040***

ABN_RPTi,t 0.935 2.925***
P_DIR_HIGHi,t *ABN_RPTi,t 0.801 2.288**
P_DIR_HIGHi,t 0.064 1.799*
SIZEi,t 0.332 10.871***
AGEi,t 0.070 2.274**
TAXi,t 0.312 1.616
DEBTi,t 0.082 0.540
LIQUIDi,t 0.032 0.390
BMi,t 1.427 12.712***
ROAi,t 0.686 0.695
BLOCKi,t 0.005 2.762***
YEAR Included
FIRM Included
Panel B:
Intercept 8.571 13.847***

ABN_RPTi,t 0.837 2.464***
GOV_HIGHi,t*ABN_RPTi,t 0.605 1.686*
GOV_HIGHi,t 0.130 3.259***
SIZEi,t 0.340 10.808***
AGEi,t 0.090 2.954***
TAXi,t 0.303 1.562
DEBTi,t 0.071 0.467
LIQUIDi,t 0.028 0.337
BMi,t 1.410 12.333***
ROAi,t 0.646 0.652
BLOCKi,t 0.007 3.524***
YEAR Included
FIRM Included
This table examines the impacts of controlling shareholders on the association between
abnormal related-party sales and firm value.
The regression equation for Panel A is as follow: Qi;t ¼ a0 þ a1 ABN RPTi;t þ
a2 P DIR HIGHi;t ABN RPTi;t þ a3 P DIR HIGHi;t þ a4 SIZEi;t þ a5 AGEi;t þ a6 TAXi;t þ
a7 DEBTi;t þ a8 LIQUIDi;t þ a9 BMi;t þ a10ROAi;t þ a11 BLOCKi;t þ ðYear DummiesÞ þ ðFirm
DummiesÞ þ e
The regression equation for Panel B is as follow: Qi;t ¼ a0 þ a1 ABN RPTi;t þ
a2 GOV HIGHi;t ABN RPTi;t þ a3 GOV HIGHi;t þ a4 SIZEi;t þ a5 AGEi;t þ a6 TAXi;t þ a7
DEBTi;t þ a8 LIQUIDi;t þ a9 BMi;t þ a10 ROAi;t þ a11 BLOCKi;t þ ðYear DummiesÞ þ ðFirm
DummiesÞ þ e
Definitions of all variables appear in Table 1. *, ** and *** indicate significance at the 10%,
5% and 1% levels, respectively (two-tail test).The t-statistics are based on standard errors
adjusted for clustering on firms.
Table 6. Regression Results for the Value of Related-Party Sales for Firms with High/Low Percentage of Parent Direc-
tors and Government Ownership
Panel A: Large versus small percentage of parent directors
Large percentage of parent

directors (P_DIR_HIGH; Small percentage of parent directors
n = 944) (P_DIR_LOW; n = 800)
Variable Coeff. t-stat. Coeff. t-stat.

Intercept 9.939 8.475*** 6.340 6.998***
ABN_RPTi,t 0.130 0.801 1.217 2.448**
SIZEi,t 0.391 7.187*** 0.223 5.356***
AGEi,t 0.092 1.318 0.041 0.641
TAXi,t 0.603 1.315 0.029 0.095
DEBTi,t 0.120 0.453 0.296 0.768
LIQUIDi,t 0.069 0.420 0.070 0.516
BMi,t 1.034 6.087*** 1.546 11.939***
ROAi,t 2.381 0.793 0.864 0.979
BLOCKi,t 0.002 0.619 0.000 0.130
YEAR Included Included
FIRM Included Included
Adjusted R-square 0.367*** 0.454***
Are Related-party Sales Value-Adding or Value-Destroying

21
22
Table 6. (Continued)
Panel B: High vs. low government ownership


Intercept 4.063 6.104*** 10.362 8.954***
ABN_RPTi,t 0.156 1.210 1.021 2.062**
SIZEi,t 0.125 4.307*** 0.411 7.692***
AGEi,t 0.027 0.621 0.025 0.446
TAXi,t 0.557 1.975** 0.160 0.492
DEBTi,t 0.682 5.295*** 0.250 1.061
LIQUIDi,t 0.280 1.855* 0.188 1.133
BMi,t 2.073 14.534*** 1.335 8.308***
ROAi,t 5.044 4.869*** 1.366 0.977
BLOCKi,t 0.001 0.479 0.002 0.837
This table examines whether abnormal related-party sales have positive or negative impacts on firm value for different subsamples. In Panel A, we
partition our total sample into two subsamples with large and small percentages of parent directors based on the median percentage. In Panel B, we
partition our total sample into two subsamples with high and low government ownership based on its sample median. The regression equation is as
follows: Qi;t ¼ a0 þ a1 ABN RPTi;t þ a2 SIZEi;t þ a3 AGEi;t þ a4 TAXi;t þ a5 DEBTi;t þ a6 LIQUIDi;t
þa7 BMi;t þ a8 ROAi;t þ a9 BLOCKi;t þ ðYear DummiesÞ þ ðFirm DummiesÞ þ e
Definitions of all variables appear in Table 1. *, **, and *** indicate significance at the 10%, 5%, and 1% levels, respectively (two-tailed test). The
Raymond M. K. Wong, Jeong-Bon Kim and Agnes W. Y. Lo
t-statistics are based on standard errors adjusted for clustering on firms.

In summary, we find that the market value of the firm is positively

related to abnormal related-party sales transactions, especially for
firms that are unlikely to be controlled or influenced by the parent
company (i.e., firms with a low percentage of parent directors and
those with low ownership concentration). Put differently, this positive
relationship becomes weakened or disappears for firms with a high
percentage of parent directors and with high concentrated ownership.
Our findings are in line with the view that RPTs are generally used for
better resource allocation, and to improve intragroup allocation effi-
ciency (Khanna and Palepu, 2000). However, firms with significant
influence from the parent company via director appointment (i.e.,
P_DIR_HIGHi,t) or via concentrated ownership (i.e., GOV_HIGHi,t)
are more likely to use RPTs as a means to manage earnings or tunnel
profits. As such, related-party sales do not add value to such firms.
Stated another way, the market discounts the value of related-party
sales transactions in an environment where controlling owners of affili-
ated firms (such as parent companies or the government) are likely to
use such transactions as a means to divert resources for their own
interest at the expenses of affiliated firms’ minority shareholders.
3.3. Influence of Corporate Tax Avoidance Incentives

Table 7 shows the descriptive statistics for three subsamples of firms
with: (i) no change in the statutory tax rate from year t–1 to year t;
(ii) an increase in the statutory tax rate from year t–1 to year t; and
(iii) a decrease in the statutory tax rate from year t–1 to year t. We
find that ABN_RPTi,t has the mean range of 0.002 to 0.003 and the
median range from 0.025 to 0.028 for the three subsamples. It
implies that firms are likely to have similar amount of abnormal RPTs,
irrespective of whether they are subject to a tax rate change or not.
Table 8 shows the regression results of equation (4). We find that
ABN_RPTi,t is positive and significant at the 1 per cent level, and the
interaction terms, TAXINi,t*ABN_RPTi,t and TAXDEi,t*ABN_RPTi,t,
are negative and significant at the 10 and 5 per cent levels, respectively.
These results imply that the positive impact of related-party sales on
firm value diminishes for firms that are subject to tax rate changes.
Table 9 reports the results of regression in equation (1), separately, for
the three partitioned tax-rate-change subsamples. As shown in Column
A, firms that are not subject to any tax rate change have a positive
association between abnormal related-party sales and firm value (where
24
Table 7. Descriptive Statistics of Tax Rate Changes

Column A Column B Column C
No change on tax rates Tax rate increased Tax rate reduced (TAXDE=1,
(n = 3,250) (TAXIN=1, n = 726) n = 544)
Variable Mean Median Std. D Mean Median Std. D Mean Median Std. D
Qi,t 0.198 0.112 1.553 0.056 0.215 1.092 0.014 0.212 0.919
ABN_RPTi,t 0.002 0.028 0.156 0.003 0.025 0.159 0.003 0.025 0.146
SIZEi,t 21.462 21.343 1.106 21.489 21.360 1.138 21.544 21.469 1.161
AGEi,t 1.978 2.079 0.551 2.027 2.197 0.619 2.216 2.303 0.407
TAXi,t 0.227 0.150 0.090 0.278 0.330 0.062 0.175 0.150 0.069
DEBTi,t 0.520 0.516 0.222 0.519 0.511 0.260 0.531 0.526 0.203
LIQUIDi,t 0.845 0.917 0.187 0.845 0.919 0.192 0.843 0.925 0.196
BMi,t 0.470 0.408 0.333 0.493 0.428 0.362 0.568 0.488 0.413
ROAi,t 0.022 0.027 0.083 0.015 0.026 0.086 0.022 0.025 0.083
BLOCKi,t 17.836 15.135 13.253 15.943 12.450 12.411 16.269 13.655 11.908
This table presents firms characteristics for three subsamples of firms with: (i) no change in the statutory tax rate from year t–1 to year t (Column
A); (ii) an increase in the statutory tax rate from year t–1 to year t (Column B); and (iii) a decrease in the statutory tax rate from year t–1 to year t
(Column C). Definitions of all variables appear in Table 1.
Table 8. Regression Results for the Impact of Tax Rate Changes on the
Value of Related-Party Sales Transactions
Intercept 8.553 13.955***
ABN_RPTi,t 0.764 2.776***
TAXINi,t* ABN_RPTi,t 0.574 1.879*
TAXDEi,t* ABN_RPTi,t 0.701 2.058**
TAXINi,t 0.097 2.116**
TAXDEi,t 0.121 2.536***
SIZEi,t 0.332 10.822***
AGEi,t 0.077 2.490***
TAXi,t 0.307 1.482
DEBTi,t 0.081 0.532
LIQUIDi,t 0.026 0.316
BMi,t 1.433 12.731***
ROAi,t 0.633 0.636
BLOCKi,t 0.004 2.719***
YEAR Included
FIRM Included
This table examines the impacts of corporate tax avoidance incentives on the association
between abnormal related-party sales and firm value. The regression equation is as follows:
Qi;t ¼ a0 þ a1 ABN RPTi;t þ a2 TAXINi;t ABN RPTi;t þ a3 TAXDEi;t ABN RPTi;t
þa4 TAXINi;t þ a5 TAXDEi;t þ a6 SIZEi;t þ a7 AGEi;t þ a8 TAXi;t þ a9 DEBTi;t þ a10 LIQUIDi;t
þa11 BMi;t þ a12 ROAi;t þ a13 BLOCKi;t þ ðYear DummiesÞ þ ðFirm DummiesÞ þ e
Definitions of all variables appear in Table 1. *, **, and *** indicate significance at the 10%,
5%, and 1% levels, respectively (two-tailed test). The t-statistics are based on standard errors
adjusted for clustering on firms.
ABN_RPTi,t is positively significant at the 1 per cent level). The results

are qualitatively similar to the main results as reported in Table 3. As
presented in Columns B and C where firms are subject to a tax rate
increase (TAXINi,t = 1) and a tax rate decrease (TAXDEi,t = 1), respec-
tively, the coefficients on ABN_RPTi,t are also positive but are not sta-
tistically significant. Besides, we find that these coefficients (in
Columns B and C) are smaller in magnitude than that reported in Col-
umn A (where firms are not subject to any tax rate change). In partic-
ular, the results of tests for differences in regression coefficients on
ABN_RPTi,t between Columns A and B and between Columns A and
C suggest that the differences are statistically significant at the 5 and
10 per cent levels (Z = 2.310 and Z = 1.920), respectively.
In sum, we find that the positive impact of ABN_RPTi,t on firm
value, as reflected by the positive coefficient on ABN_RPTi,t, decreases
when firms experience a tax rate change. Our results in Tables 8 and 9
suggest that firms experiencing a tax rate increase are likely to make
26
Table 9. Regression Results for the Tobin’s Q, Abnormal Related-Party Sales Transactions, and Tax Rate Changes
No change on tax rates Tax rate increased Tax rate reduced

(n = 3,250) (TAXIN=1, n = 726) (TAXDE=1, n = 544)
Variable Coefficient t-statistic Coefficient t-statistic Coefficient t-statistic

Intercept 9.084 11.449*** 7.651 7.632*** 5.280 5.792***
ABN_RPTi,t 0.755 2.759*** 0.143 1.412 0.172 0.978
SIZEi,t 0.354 8.873*** 0.300 5.627*** 0.203 4.706***
AGEi,t 0.091 2.413** 0.007 0.121 0.067 0.799
TAXi,t 0.322 1.312 0.491 0.992 0.183 0.325
DEBTi,t 0.178 0.975 0.307 0.969 0.393 1.543
LIQUIDi,t 0.095 0.881 0.077 0.549 0.180 1.021
BMi,t 1.615 12.087*** 1.353 4.685*** 1.068 4.997***
ROAi,t 0.424 0.311 1.013 1.312 1.360 1.593
BLOCKi,t 0.004 1.901* 0.004 1.544 0.006 1.880*
YEAR Included Included Included
FIRM Included Included Included
Adjusted 0.277*** 0.433*** 0.410***
R-square
This table examines the association between Tobin’s Q and related-party sales transactions for three subsamples of firms with: (i) no change in the
statutory tax rate from year t–1 to year t (Column A); (ii) an increase in the statutory tax rate from year t–1 to year t (Column B); and (iii) a
decrease in the statutory tax rate from year t–1 to year t (Column C). The regression equation is as follows: Qi;t ¼ a0 þ a1 ABN RPTi;t
þa2 SIZEi;t þ a3 AGEi;t þ a4 TAXi;t þ a5 DEBTi;t þ a6 LIQUIDi;t þ a7 BMi;t þ a8 ROAi;t þ a9 BLOCKi;t þ ðYear DummiesÞ þ ðFirm DummiesÞ þe

use of related-party sales transactions as a means for tax avoidance or

planning activities. This in turn provides managers with an excuse for
rent extraction activities such as tunneling profits out via related-party
sales transactions (Desai et al., 2007). Similarly, firms experiencing a
tax rate decrease are likely to use related-party sales transactions as an
excuse for tax avoidance or planning activities and as a vehicle for
propping up earnings to hide bad news and for covering up other
earnings manipulations (Kim et al., 2011). Earnings manipulation dete-
riorates the quality of financial reporting, thereby exacerbating the
information asymmetry between inside managers and outside investors.
As a result, tax avoidance and planning activities have a negative
impact on firm value. In our cases, the positive impact of ABN_RPTi,t
on firm value is offset by the negative impact of tax planning for firms
that are subject to a tax rate increase and decrease.15
4. Further Tests
4.1. Stock Return and Related-party Sales Transactions
If the market views related-party sales transactions as value-adding
activities, one can predict that stock market performance should be
positively associated with the extent of a firm’s involvement in related-
party sales activities. To test this prediction, we now investigate the
impacts of abnormal related-party sales on abnormal (excess) stock
return. Specifically, we replace the dependent variable, Tobin’s Q, in
equation (1) by a firm’s annual abnormal return, ARi,t, which repre-
sents a size-adjusted buy-and-hold stock return inclusive of dividends.
To make sure that our measure of abnormal returns fully reflects
information about a firm’s operational performance in the current
year, we measure annual stock return from the beginning of the fourth
month of the current year to the end of the third month of the follow-
ing year.
Table 10 reports the results of regression for this further test. As
shown in Table 10, Panel A, we find that the coefficient on
ABN_RPTi,t is positive and significant at the 10 per cent level. We also
find that the coefficients on ABN_RPTi,t are significantly positive at
the 1 and 5 per cent levels, respectively, for the subsamples of firms
with low government ownership (Panel C) and of firms with no tax
rate changes (Panel D). The above findings are similar to those using
Tobin’s Q as the dependent variable (as reported in Section 3). The
28
Table 10. Regression Results for the Abnormal Return and Abnormal Related-Party Sales Transactions
Panel A: Whole sample (n = 4,520)

Intercept 0.001 0.118

ABN_RPTi,t 0.005 1.692*
SIZEi,t 0.000 0.277
AGEi,t 0.001 0.811
TAXi,t 0.004 0.804
DEBTi,t 0.003 1.258
LIQUIDi,t 0.002 0.830
BMi,t 0.016 9.220*
ROAi,t 0.057 7.917***
BLOCKi,t 0.001 0.754
YEAR Included
FIRM Included
Panel B: Large vs. small percentage of parent directors

n = 944) n = 800)

Intercept 0.005 0.242 0.023 1.082
ABN_RPTi,t 0.006 1.293 0.009 0.950
SIZEi,t 0.001 0.019 0.001 0.997

AGEi,t 0.001 0.815 0.004 2.720***
TAXi,t 0.006 0.642 0.010 1.098
Panel B: Large vs. small percentage of parent directors

n = 944) n = 800)

DEBTi,t 0.002 0.321 0.002 0.359
LIQUIDi,t 0.001 0.158 0.005 0.843
BMi,t 0.014 4.854*** 0.016 3.987***
ROAi,t 0.051 3.635*** 0.081 5.681***
BLOCKi,t 0.001 0.108 0.001 0.588
Panel C: High vs. low government ownership


Intercept 0.017 1.179 0.029 1.409
ABN_RPTi,t 0.002 0.523 0.013 2.171**
SIZEi,t 0.001 1.003 0.002 1.701*
AGEi,t 0.000 0.153 0.000 0.311
TAXi,t 0.002 0.312 0.000 0.057
DEBTi,t 0.010 2.443** 0.001 0.252

LIQUIDi,t 0.001 0.289 0.001 0.165

29
30

Panel C: High vs. low government ownership


BMi,t 0.025 7.769*** 0.017 5.320***
ROAi,t 0.065 4.688*** 0.043 3.988***
BLOCKi,t 0.001 1.322 0.001 0.081
Panel D: No change on tax rates vs. tax rates increased or reduced

(n = 3,250) (TAXIN=1, n = 726) (TAXDE=1, n = 544)
Variable Coefficient t-stat Coefficient t-stat Coefficient t-stat

Intercept 0.002 0.198 0.059 2.269** 0.022 0.612
ABN_RPTi,t 0.008 2.222** 0.010 1.419 0.005 0.759
SIZEi,t 0.000 0.474 0.002 1.999** 0.001 0.606
AGEi,t 0.001 0.011 0.003 1.957** 0.001 0.026
TAXi,t 0.000 0.096 0.026 1.459 0.033 1.358
DEBTi,t 0.007 2.423** 0.003 0.657 0.016 1.589
LIQUIDi,t 0.001 0.433 0.004 0.690 0.016 1.434

BMi,t 0.016 7.574*** 0.018 5.117*** 0.019 4.043***
ROAi,t 0.069 7.345*** 0.041 3.446*** 0.010 0.533
Panel D: No change on tax rates vs. tax rates increased or reduced

(n = 3,250) (TAXIN=1, n = 726) (TAXDE=1, n = 544)
Variable Coefficient t-stat Coefficient t-stat Coefficient t-stat

BLOCKi,t 0.001 0.127 0.001 0.689 0.000 3.061***
YEAR Included Included Included
FIRM Included Included Included
Adjusted R-square 0.078*** 0.062*** 0.075***
This table examines whether abnormal related-party sales have significant impacts on a firm’s abnormal return. The regression equation is as follows:
ARi;t ¼¼ a0 þ a1 ABN RPTi;t þ a2 SIZEi;t þ a3 AGEi;t þ a4 TAXi;t þ a5 DEBTi;t þ a6 LIQUIDi;t þ a7 BMi;t þ a8 ROAi;t þ a9 BLOCKi;t þ ðYear DummiesÞþ
ðFirm DummiesÞ þ e

31
only difference is that, as shown in Panel B of Table 10, the coefficient

on abnormal related-party sales (ABN_RPTi,t) is not significant across
the sample firms with a low percentage of parent directors, while in
Panel B of Table 6, the ABN_RPTi,t coefficient is significantly positive
for the same sample. In short, the results reported in Tables 3, 6, 9
and 10, taken together, indicate that the market views related-party
sales as value-adding, particularly for firms with relatively less incen-
tives for asset diversion via related-party sales transactions; however,
for firms with relatively high incentives for asset diversion (i.e., firms
with a high percentage of government ownership and/or with tax rate
changes), the related-party sales transactions appear to be non-value-
adding. This is because the positive impacts of related-party sales on
firm valuation and/or stock return performance are offset by the nega-
tive impacts associated therewith (e.g., the use of related-party sales
for tunneling assets for the interest of non-listed parent companies or
controlling shareholders).
4.2. Sensitivity Tests

We conduct several additional tests to check the robustness of our
regression results shown in Section 3. First, we replace the test variable
in equation (1), ABN_RPTi,t, by RPTi,t. RPTi,t measures the total
amount of related-party sales scaled by the total assets. Although not
tabulated, for brevity, the results of regression using RPTi,t in lieu of
ABN_RPTi,t are similar to those using ABN_RPTi,t (as reported in
Table 3). Specifically, we find that the coefficient on RPTi,t is positive
and significant below the 10 per cent level. The above results suggest
that the valuation effect of related-party sales transactions holds, irre-
spective of whether the total (unadjusted) amount of RPTi,t or the
abnormal (residual) amount of RPTi,t is used.
Second, as prior studies show that the government ownership through
listed SOEs or asset management bureaus has differential impacts than
those from the government ownership through unlisted SOEs, we
exclude firms being owned by listed SOEs and state-asset investment
bureaus from government-owned companies (Berkman et al., 2009,
2010) and rerun equation (1) for the subsamples with high/low govern-
ment ownership. The results are qualitatively similar to the original
results reported. Although nor reported for brevity, we find that the
coefficients on ABN_RPTi,t are positively significant for the subsample
with a low percentage of government ownership, and not significant for
the subsample with a high percentage of government ownership. We also

include GOV_LOWi,t (P_DIR_LOWi,t) in equation (1) as a control var-
iable when analyzing the subsamples of parent-director ownership (gov-
ernment ownership). Untabulated results further show that the
coefficient on ABN_RPTi,t remains positively significant for the subsam-
ples with a low percentage of parent directors and government owner-
ship, whereas the coefficients on GOV_LOWi,t and P_DIR_LOWi,t are
insignificant. That means that the inclusion of the additional variables
does not alter our statistical inferences on the variables of interest.
Third, we reclassify the subsamples of firms with a large and small
percentage of parent directors and those with high and low government
ownerships, using different classification methods. Specifically, a firm is
classified as having a large (small) percentage of parent directors if its
percentage of parent directors is above (below) the median in the cur-
rent year (instead of all the years during the sample period). Similarly, a
firm is classified as having high (low) government ownership if its gov-
ernment ownership is above (below) the median in the current year. We
find that the regression results using these newly constructed subsam-
ples are similar to those reported in Table 6: The coefficients on
ABN_RPTi,t are positively significant only for the subsamples with a
small percentage of parent directors and low government ownership.
Finally, Lo et al. (2010a) find that firms with a board with a high
percentage of independent directors show a smaller magnitude of
manipulated transfer prices for RPTs. We thus control for the possible
effects of this type of director on the value of related-party sales by
adding IND_DIRi,t (expressed as the percentage of independent direc-
tors) as an additional control variable. Untabulated results show that
the coefficient on IND_DIRi,t is insignificant, suggesting that the inclu-
sion of this variable does not alter our statistical inferences on the
variables of interest.
5. Conclusions
In this study, we investigate the impact of abnormal related-party sales
transactions on firm valuation captured by industry-adjusted Tobin’s
Q. Further, we also examine whether and how two aspects of influence
of controlling shareholders, namely the percentages of parent directors
and government ownership, matter in determining the relation between
related-party sales transactions and firm value. The results, using a
sample of Chinese listed firms, show that related-party sales transac-
tions have a significantly positive impact on firm value in general.

However, this positive impact of related-party sales on firm value is
less prominent for firms with a large percentage of parent directors on
board than for firms with a small percentage of parent directors. We
also find that the positive impact of related-party sales on firm value
disappears for firms with high government ownership, while it remains
significant for firms with low government ownership.
Our results provide useful insights into whether and how the control
power and incentive structure of controlling shareholders, captured by
their ownership and parent directorship, affect the impact of related-
party sales on firm value. Specifically, related-party sales transactions
are value-adding to the extent that the transactions improve the effi-
ciency of internal resource allocation among affiliated firms within the
same corporate group. However, this value-adding effect is mitigated
or offset in an environment where controlling shareholders of affiliated
firms, such as unlisted parent companies or the government, exercise
their control against the interest of affiliated firms.
We also find that even though abnormal related-party sales had a
positive impact on firm value, this positive impact was offset by the
associated negative impact when corporate insiders, such as controlling
shareholders or corporate executives, have incentives to use RPTs as a
tax planning tool in response to tax rate changes. These results lend
further support to the view that corporate tax avoidance and planning
activities are used as an excuse for managerial opportunism such as
accrual management and as a vehicle for tunneling or resource diver-
sion, rather than as an opportunity for pure tax savings and profit
maximizing activities. The results suggest that outside investors or
minority shareholders should look into the details of tax avoidance
and planning activities to see whether these activities are used to cover
up any earnings manipulation or tunneling activities. Given the scar-
city of empirical evidence on the economic consequences of RPTs, we
recommend further research on how RPTs can influence a firm’s oper-
ational performance, firm valuation, and stock return.
Notes
1. For example, the China Securities Regulatory Commission (CSRC) requires listed
firms in China to maintain a certain level of return on equity (ROE) to be qualified for
seasoned equity offerings. Also, the CSRC will delist a listed firm at least temporarily if

it reports losses for three consecutive years. These regulatory requirements create incen-
tives for earnings management to meet the regulatory targets.
2. Related-party sales in this study mean sales of goods and services between related
companies. A more detailed discussion of this definition will be provided in Section 2.
3. For example, the management of Ford Motor Company of Canada Ltd engaged in
a transfer pricing scheme that shifted profits from the company to its controlling share-
holder, Ford U.S., for tax purposes. However, the minority shareholders of Ford
Motor Company of Canada Ltd suffered losses from this tax planning activity because
the transfer price practices were unfairly prejudicial.
4. We use industry-adjusted Tobin’s Q to proxy for a firm value. Details could be
referred to Section 2.
5. We follow Jian and Wong (2010) to calculate the value of abnormal related-party
transactions by running a regression on related-party sales. Further discussion will be
presented in Section 2.
6. Ryngaert and Thomas (2012) also reconcile the mixed value contributed by RPTs.
Instead of suggesting ways to correctly identify transactions initiated before or after a
counterparty becomes a related-party, our study provides systematic evidence and
shows that corporate insiders (i.e., controlling shareholders and management) play an
important role in affecting the firm’s value via related-party sales.
7. As will be further explained in the next section, due to preferential tax rate policies
in China, a firm’s statutory tax rate can be different among our sample firms.
8. We limit our sample firms to those listed on the Shanghai stock exchange, excluding
those listed on the Shenzhen stock exchange, due to considerable costs of manually col-
lecting statutory tax rate and ultimate shareholders data.
9. To remove any normal components of RPTs that are associated with firm character-
istics and industry effects, we follow Jian and Wong (2010) by using cross-sectional
data and run the following OLS regression year by year (2002–2009):
RPTi ¼ a0 þ a1 SIZEi þ a2 DEBTi þ a7 BMi þ ðIndustry DummiesÞ þ e
where RPTi is a firm’s related-party sales divided by the total assets. SIZEi is the natu-
ral log of a firm’s total assets. DEBTi is a firm’s debt-to-asset ratio. BMi is a firm’s
book-to-market equity ratio. Abnormal related-party sales (ABN_RPTi) are the residu-
als of the above regression.
10. We do not include control variables to indicate S&P 500 or Delaware firms as this
information is not applicable to China data.
11. The Chinese government offers a basket of tax incentives and tax reductions to
firms for a variety of reasons (e.g., to restructure their operations, to increase invest-
ment in certain regions, or to encourage growth in selected industries). As one example
of these tax preferences, advanced and new technology companies are subject to a
reduced tax rate of 15 per cent, whereas the general statutory tax rate without any tax
rate reduction is 25 per cent (on or after 2008) and 33 per cent (before 2008) (Tohma-
tsu, 2008).
12. Government ownership is measured by the percentage of shares owned by the larg-
est shareholder if the ultimate shareholder is the government (we trace through the pyr-
amid shareholding structures to identify the ultimate controlling investor). Government
here includes the local or state government, government ministries, government
bureaus, state-asset management bureaus, state research institutes, state-owned banks,
state-owned enterprises, and state-investment bureaus. As a sensitivity test, we follow
Berkman et al. (2009, 2010) and reclassify state-owned enterprises and state-asset

investment bureaus as non-government-owned companies. The results are qualitatively

similar. Details will be discussed in the Sensitivity Tests section.
13. As a sensitivity test, we classify a firm-year observation as a large (small) percent-
age of parent directors if its percentage of parent directors is above (below) the median
in the current year. Similarly, an observation is classified as high (low) government
ownership if its government ownership is above (below) the median in the current year.
The results are qualitatively similar to the original results reported. We discuss about
the related issue in more detail in the Sensitivity Tests section.
14. Effective January 1, 2008, China introduced a new Enterprise Income Tax Law
under which the general statutory enterprise income tax rate is reduced from 33 to 25
per cent (Tohmatsu, 2008). Prior to the year 2008, firms may also enjoy the preferential
tax policies as specified earlier and have the statutory tax enterprise income tax rate
below 33 per cent.
15. In a supplementary test, we find that there is a positive association between
abnormal related-party sales and abnormal (excess) stock return for firms that are
subject to no tax rate change, but the positive association disappears for firms that
are subject to a tax rate increase or a tax rate decrease. These findings further buttress
our results that the firm value enhancement associated with RPTs is offset by corpo-
rate tax avoidance and planning activities. More details will be presented and dis-
cussed in Section 4.
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Journal of International Financial Management & Accounting 26:1 2015

Are Related-Party Sales Value-Adding or

reveal that ﬁrms engage in related-party transactions (RPTs) to oppor-

Although prior accounting scandals and literature suggest that

on ﬁrm value. Therefore, our study aims to provide an in-depth analy-

of shares outstanding, and about 67 per cent of the largest sharehold-

value enhancement associated with RPTs tends to be reduced by cor-

2. Data and Research Design

2.1. Firm Value and Related-Party Sales

Qi;t ¼ a0 þ a1 ABN RPTi;t þ a2 SIZEi;t þ a3 AGEi;t þ a4 TAXi;t

In the above, the dependent variable, Qi,t, represents industry-

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Given the nature of business and industry structures, a ﬁrm can

2.2. Inﬂuence of Controlling Shareholders

sales transactions. Given the above conﬂicting arguments, the direc-

Qi;t ¼ a0 þ a1 ABN RPTi;t þ a2 P DIR HIGHi;t ABN RPTi;t

Qi;t ¼ a0 þ a1 ABN RPTi;t þ a2 GOV HIGHi;t ABN RPTi;t

In equation (2), P_DIR_HIGHi,t is equal to 1 if the percentage of

classify a ﬁrm as having a large (small) percentage of parent directors

2.3. Inﬂuence of Corporate Tax Avoidance Incentives

rate tax avoidance is positively associated with ﬁrm-speciﬁc stock price

Qi;t ¼ a0 þ a1 ABN RPTi;t þ a2 TAXINi;t ABN RPTi;t þ a3 TAXDEi;t

In equation (4), TAXINi,t is an indicator variable that is equal to 1

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3.2. Firm Value, Related-Party Sales, and Controlling Shareholders’

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Table 1. Variable Deﬁnitions

Table 2. Summary Statistics

Figure 1. Relation Between Firm Value and Abnormal Related-Party

Table 3. Regression Results for the Value of Related-Party Sales Transac-

shareholders (i.e., large percentage of parent directors and high

Table 4. Descriptive Statistics for Firms with High/Low Percentage of

Large percentage of parent Small percentage of parent

Variable Mean Median Std. D Mean Median Std. D

Panel B: High vs. low government ownership

High government ownership Low government ownership

Variable Mean Median Std. D Mean Median Std. D

We ﬁnd, however, that for the high-percentage subsample (i.e.,

Table 5. Regression Results for the Impact of Controlling Shareholders on

Intercept 8.526 14.040***

Intercept 8.571 13.847***

Large percentage of parent

Variable Coeﬀ. t-stat. Coeﬀ. t-stat.

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High government ownership Low government ownership

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Variable Coeﬀ. t-stat. Coeﬀ. t-stat.

t-statistics are based on standard errors adjusted for clustering on ﬁrms.

In summary, we ﬁnd that the market value of the ﬁrm is positively

3.3. Inﬂuence of Corporate Tax Avoidance Incentives

Table 7. Descriptive Statistics of Tax Rate Changes

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ABN_RPTi,t is positively signiﬁcant at the 1 per cent level). The results

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Variable Coefficient t-statistic Coefficient t-statistic Coefficient t-statistic

t-statistics are based on standard errors adjusted for clustering on ﬁrms.

use of related-party sales transactions as a means for tax avoidance or

Variable Coeﬃcient t-statistic