Agency Costs of Related Party Transactions in the Internal Markets

Lee, Won Heum

Korean Journal of Financial Studies 2009;38(2):257-288.
Published online June 30, 2009.

Won Heum Lee

대주주 연계거래의 대리인비용에 관한 연구

이원흠

Abstract

I can examine the agency problems of the related party transactions (hereafter referred to as "RPT") between a listed company and its controlling shareholders by directly estimating the size of the agency costs of the firm. The estimation of agency costs is based on a firm valuation model of Lee (2009) under the assumptions of the existence of corporate taxes, growth opportunities, bankruptcy costs, and agency costs. The RPT samples of this study are collected from the mandatory disclosures for a period of seven years from 2000 to 2006. The empirical results are summarized as follows. First, It is observed that the agency problems seem to occur in the internal capital market and also in the internal business market of the RPT. Second, a majority of the RPT in the internal capital market can contribute to reducing the size of agency costs and then to increasing the intrinsic values of the companies. On the other hand, one third of the RPT in the internal business market can contribute to reducing the size of agency costs. Accordingly I can conclude that either tunneling or propping hypothesis regarding to the RPT is equally well supported in both markets. Third, I can suggest that proper disclosure informations about the RPT will benefit both the involved companies and outside investors in general.

Key Words: 내부시장,대리인비용,대주주 연계거래,배임가설,조장가설,Agency Costs,Internal Markets,Propping Hypothesis,Related Party Transactions,Tunneling Hypothesis