Corporate Governance and Related Party Transactions in Global Supply Chains.

This article investigates how corporate governance affects operational diversion in related party transactions (RPTs) between parent firms and their foreign subsidiaries within multinational firms' global supply chains. Using a unique dataset of Korean multinational firms from 2006 to 2013 and leveraging the 2011 adoption of International Financial Reporting Standards (IFRS) in Korea as a natural experiment, the study finds that operational diversion—where a parent firm's manager prioritizes parent-only performance at the expense of overall supply chain efficiency—is more pronounced in RPTs involving vertical subsidiaries (focused on production efficiency) than horizontal subsidiaries (market-seeking). Strong corporate governance mechanisms, including internal governance, institutional ownership, and large shareholders, significantly mitigate operational diversion in transactions with vertical subsidiaries but have less impact on horizontal subsidiaries. The findings highlight the need for tailored governance and monitoring strategies that consider the subsidiary's role, emphasizing enhanced oversight of vertical subsidiary relationships and the empowerment of local managers, especially in countries with weaker legal protections.