In emerging economies, tunneling is a commonly examined feature of business groups because their pyramidal organizational structures allow an apex firm’s dominant shareholders to control affiliates. This study used both direct and indirect methods of examining tunneling behavior and its causes and consequences in firms listed in the Pakistan Stock Exchange belonging to different business groups. For this purpose, the data of167 nonfinancial firms that recorded RPTs in their annual reports from 2006 to 2013 used for analysis. The empirical results of different regression models suggested that board size, board independence, CEO compensation, institutional, and foreign ownership have a significant negative effect on the related party transactions, whereas ownership of the associated firms, CEO duality, and managerial ownership have a positive effect on the RPTs. Moreover, bank loans, multiple bank relationships, and audit quality have a significant and negative effect on the RPTs. The performance models show that RPTs have a negative effect on accounting based measures such as return on assets, return on equity, earning per share and market-based performance such as Tobin’s Q. Further, this study applied the indirect empirical technique developed by Bertrand, Mehta, and Mullainathan (2002) for measuring tunneling in business groups. For this purpose, a sample of 396 firms for a period of 2006 to 2015 considered for the estimation of regression models. The results suggested that group firms are more sensitive to industry shocks as compared to standalone-firms. Furthermore, group-firms with a higher level of managerial ownership and associated ownership are less sensitive to industry shocks. The overall results are consistent with the conflict of interest hypothesis and the tunneling behavior of the controlling shareholders in Pakistani business groups.