The impact of related parties’ transactions on sustainability performances: the Italian context

Purpose: We analysed the influence of related parties’ transactions (RPTs) on environmental, social, and governance (ESG) performance. Methodology: The empirical analysis was conducted on a sample of Italian nonfinancial groups with parent companies listed on the Milan Stock Exchange during 2020-2021. Findings: The findings reveal that groups engaging more intensively in RPTs present lower ESG performance, meaning that RPTs signal weaker attention towards sustainability issues. The results are consistent with the conflict-of-interest view related to RPTs, revealing that the presence of RPTs brings in the expropriation of resources at the expense of sustainability issues. Managerial implications: The findings show a connection between financing decisions and sustainability activities, highlighting that companies involved whit RPTs could overcome their financial constraints by using these related transactions and tend to spend less attention on sustainability issues. However, the strategy to consider sustainability as a brand reputation tool, which can be dismissed once the return from the operational activity becomes positive, can be myopic considering that the ESG approach is oriented towards companies’ long-term prosperity. Research limits and Originality: We explored the relationship between RPTs and ESG performance, - a topic that has received little attention from academic research - in a setting characterized by companies with pyramid ownership structures, the presence of a dominant shareholder, and Type II agency problems. Therefore, the results cannot be generalized.