From PhilC's article on Page Rank.
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Originally Posted by http://www.webworkshop.net/pagerank.html#outbound_links
Outbound links are a drain on a site's total PageRank. They leak PageRank. To counter the drain, try to ensure that the links are reciprocated. Because of the PageRank of the pages at each end of an external link, and the number of links out from those pages, reciprocal links can gain or lose PageRank. You need to take care when choosing where to exchange links.
When PageRank leaks from a site via a link to another site, all the pages in the internal link structure are affected. (This doesn't always show after just 1 iteration). The page that you link out from makes a difference to which pages suffer the most loss. Without a program to perform the calculations on specific link structures, it is difficult to decide on the right page to link out from, but the generalization is to link from the one with the lowest PageRank.
Many websites need to contain some outbound links that are nothing to do with PageRank. Unfortunately, all 'normal' outbound links leak PageRank. But there are 'abnormal' ways of linking to other sites that don't result in leaks. PageRank is leaked when Google recognizes a link to another site.
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If you reciprocate every link that you receive, you leak page rank for every inbound that you receive. There is a median point where a link from a site without enough PR will result in a greater drain than boost from the link for your own site. This point is directly tied to your current PR value.
The overall goal is to reciprocate links only to websites with equal or higher PR than your sites, and to only get unreciprocated links from websites with lower PR. This is why it's better to develop relationships with on-topic sites instead of joining link exchanges. A strong relationship with an on-topic site will usually result in them linking to you without asking for a reciprocating link, especially if your content is of value. Link exchanges, on the other hand, have a saturation point where they begin to drain your PR instead of boosting it.
Also, a strong relationship with an on-topic site, or any site for that matter, brings a great many other benefits than just PR. In fact, I wouldn't recommend basing any relationship on PR at all.