The Cost of Related Party Transactions and the Intensity of Related Party Transactions: Evidence From Creditor Rights Reform

This study investigates whether an increase in the costs associated with related party transactions (RPTs) for controlling owners affects the volume of such transactions. We exploit the implementation of the Insolvency and Bankruptcy Code (IBC) in India in 2016 as a quasi‐natural experiment that likely raised the costs of engaging in RPTs by strengthening creditor rights. Using a difference‐in‐differences design, we find that the enhanced enforcement environment following the IBC led to a significant decline in RPT activity by controlling shareholders. This decline is primarily driven by a reduction in opportunistic RPTs. Furthermore, the average market reaction to the IBC implementation is more pronounced for firms with higher pre‐reform levels of opportunistic RPTs, consistent with investors valuing the curtailment of tunneling behavior.