Related party transactions (RPTs) are transactions made among affiliated companies in a conglomerate group. Heavy RPT ratio means high level of dependence of a firm on the captive market within a conglomerate group. This may depress the firm's incentive to invest in R&D and the high level of R&D expenditure of a firm with heavy RPT ratio may not be efficiently led to high level of firm performances. Relating these RPTs with firm's R&D expenditures together, we investigate the impact of RPTs on firm's R&D expenditures and the effectiveness of R&D with heavy RPT ratio on firm performances, subject to such transactions made by Korean conglomerate groups for the period 2000 to 2010. Results show that higher RPT ratio is negatively associated with R&D expenditures; and the positive relationship between R&D and firm values are negatively moderated by increase in RPTs. Classifying the types of R&D expenditures into research expenses and development expenses, the results are differentiated between them. Evidencing the impact of RPTs on R&D spending and the subsequent effectiveness on firm values, this study helps the related parties to understand the nature of RPTs and conglomerate groups, related to R&D and firm performances, and to make relevant decisions.
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