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Journal ArticleDOI

Buy High, Sell Low: How Listed Firms Price Asset Transfers in Related Party Transactions

TL;DR: In this article, the authors examined a sample of 254 related party and arms' length acquisitions and sales of assets in Hong Kong during 1998-2000 and found that publicly listed firms enter deals with related parties at unfavorable prices compared to similar arms-length deals.
Abstract: We examine a sample of 254 related party and arms' length acquisitions and sales of assets in Hong Kong during 1998-2000. Our analysis shows that publicly listed firms enter deals with related parties at unfavorable prices compared to similar arms' length deals. Firms acquire assets from related parties by paying a higher price compared to similar arms' length deals. In contrast, when they sell assets to related parties, they receive a lower price than in similar arms' length deals. With the exception of audit committees, corporate governance characteristics have limited impact on transaction prices. Firms with audit committees on their boards pay lower prices to related parties for acquisitions and receive higher prices from related parties from divestments.
Citations
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Journal ArticleDOI
TL;DR: In this article, the authors examined the impact of country-level institutional characteristics on the underpricing of IPOs through hierarchical linear modeling and found that about 10% of the variation in the level of under pricing is between countries.
Abstract: Using a large firm-level dataset of 2920 IPOs from 21 countries we examine the impact of country-level institutional characteristics on the underpricing of IPOs. Through hierarchical linear modeling we are able to control for firm-specific and issue-specific characteristics and test whether country-specific institutional characteristics add explanatory power to explain the level of underpricing. Our results show that about 10% of the variation in the level of underpricing is between countries. The quality of a country’s legal framework, as measured by its level of investor protection, the overall quality of its legal system and its level of legal enforcement, reduces the level of underpricing significantly.

179 citations

10 Mar 2011
TL;DR: In this paper, a fine-grained understanding about the role of ownership in different contexts is provided, taking into account the subtly different formal and informal institutional that can be found around the world on the one hand, and distinguish between the identity of concentrated owners on the other.
Abstract: textThe past two decades have witnessed an exponential growth of research on corporate governance around the world and on the role of the ownership concentration more specifically. In line with a longer tradition of ownership studies in U.S. context, most corporate governance researchers have commonly taken a classical agency theoretical view of ownership concentration. The research presented in this dissertation show that classical view of ownership seems overly crude. I provide a more fine-grained understanding about the role of ownership in different contexts; one that takes into account the subtly different formal and informal institutional that can be found around the world on the one hand, and that distinguish between the identity of concentrated owners on the other. I show, first, that a crucial factor with respect to the ownership concentration – firm strategy and performance relationships involve owner identity: i.e. who owns a firm matters significantly for that firm’s objectives, strategies, and performance. Second, I contribute to emerging institution-based view of corporate governance by expanding its empirical domain and testing empirically the interaction between formal and informal institutions.

96 citations


Cites background from "Buy High, Sell Low: How Listed Firm..."

  • ...This can happen, among others, in the form of transfer pricing, asset stripping, and investor dilution (Berkman et al., 2009; Cheung et al., 2009)....

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Posted Content
TL;DR: Related party transactions (RPTs) are potential means for insiders to expropriate outside shareholders via self-dealing as discussed by the authors, however, there are possible benefits to these arrangements for outside shareholders.
Abstract: Related party transactions (RPTs) are potential means for insiders to expropriate outside shareholders via self-dealing. There are, however, possible benefits to these arrangements for outside shareholders. We find that the overall volume of disclosed RPTs is generally not significantly associated with shareholder wealth as measured by operating profitability or Tobin’s Q. However, the results for total RPT volume obscure that ex-ante RPTs, transactions that pre-date a counterparty becoming a related party, are innocuous at worst in terms of their association with operating profitability and significantly positively associated with Tobin’s Q whereas ex-post RPTs, transactions initiated after a counterparty becomes a related party, are significantly negatively associated with operating profitability. Ex-post RPTs also result in significant share price declines when first disclosed and are associated with an increased likelihood that a firm will enter financial distress or deregister its securities. These results are consistent with ex-post RPTs serving as means for insiders to expropriate outside shareholders.

90 citations

Journal ArticleDOI
TL;DR: In this article, the authors examined whether related party transactions (RPT) are used as a mechanism for tunneling among firms belonging to large business groups in Korea (chaebols), and they found that the control-ownership wedge is positively associated with the magnitude of RPTs.
Abstract: In this study, we examine whether related party transactions (RPT) are used as a mechanism for tunneling among firms belonging to large business groups in Korea (chaebols). Using 982 firm-year data of publicly traded firms in Korea, we find that the control–ownership wedge is positively associated with the magnitude of RPTs. RPTs increase as voting rights increase, while RPTs decrease as cash flow rights increase. The control–ownership wedge is more closely related to RPTs among the top 5 chaebol firms where the agency conflicts between the controlling shareholders and the minority shareholders are more severe than in non-top 5 chaebol firms. While the significant positive association between the control–ownership wedge and RPTs holds for both operating and non-operating RPTs, we find that non-top 5 chaebols use only non-operating RPTs whereas the top 5 firms use both operating and non-operating RPTs. Finally, we find that RPTs of Korean chaebol firms, on average, reduce firm value, but this value destruction is observed only when the control–ownership wedge is high and is more pronounced with the top 5 chaebol firms. Overall, our results together suggest that RPTs occur when the agency problem is severe and they are used as a means of tunneling, thus destroying firm value.

75 citations

Journal ArticleDOI
TL;DR: Wang et al. as discussed by the authors investigated whether Type I tunneling is affected by the internal governance mechanisms (IGMs) from the perspective of principal-principal (P-P) conflict between controlling shareholders and minority shareholders.
Abstract: Using a sample of 117 Chinese listed companies with a total of 540 firm-year observations during the important period of regulatory change and organizational reform between 2001 and 2005, this study aims to investigate whether Type I tunneling is affected by the internal governance mechanisms (IGMs) from the perspective of principal-principal (P-P) conflict between controlling shareholders and minority shareholders. Our findings suggest that state ownership and board of directors‟ meeting are positively correlated with direct transferring of Type I tunneling, but size of board of directors and number of independent directors reveal a negative association. Other IGMs including foreign ownership, supervisory board size, number of professional supervisors and supervisory board meeting were found to have no impact.

66 citations


Cites background from "Buy High, Sell Low: How Listed Firm..."

  • ...Cheung et al. (2009) investigate related party transactions between Chinese listed companies and their controlling shareholders in a two-year time slot during 2001–2002....

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  • ...…China, and all use the direct transfer or Type I tunneling method (e.g., Aharony, Wang, & Yuan, 2010; Berkman et al., 2009; Chen, Jian, & Xu, 2009; Cheung et al., 2009; Gao & Kling, 2008a; Jian & Wong, 2010; Jiang et al., 2010; Li, 2010; Liu & Tian, 2012; Lo, Wong, & Firth, 2010; Peng, Wei, &…...

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  • ...…related party transactions and transactions used for direct transfer of Type I tunneling; there are three motivations of related party transaction: tunneling, propping, and earnings management (Cheung et al., 2009), and this study only used tunneling as one potential source of asset appropriation....

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References
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Journal ArticleDOI
TL;DR: In this article, a parameter covariance matrix estimator which is consistent even when the disturbances of a linear regression model are heteroskedastic is presented, which does not depend on a formal model of the structure of the heteroSkewedness.
Abstract: This paper presents a parameter covariance matrix estimator which is consistent even when the disturbances of a linear regression model are heteroskedastic. This estimator does not depend on a formal model of the structure of the heteroskedasticity. By comparing the elements of the new estimator to those of the usual covariance estimator, one obtains a direct test for heteroskedasticity, since in the absence of heteroskedasticity, the two estimators will be approximately equal, but will generally diverge otherwise. The test has an appealing least squares interpretation.

25,689 citations

Posted Content
TL;DR: This paper examined legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries and found that common law countries generally have the best, and French civil law countries the worst, legal protections of investors.
Abstract: This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common law countries generally have the best, and French civil law countries the worst, legal protections of investors, with German and Scandinavian civil law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.

14,563 citations


"Buy High, Sell Low: How Listed Firm..." refers background in this paper

  • ...Some studies use the legal system (in particular investor protection) as a proxy for the likelihood of expropriation (La Porta et al., 1998; 2000b; Johnson et al., 2000; Nenova, 2003; Djankov et al., 2007)....

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Journal ArticleDOI
TL;DR: In this article, the authors examined legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries and found that common-law countries generally have the strongest, and French civil law countries the weakest, legal protections of investors, with German- and Scandinavian-civil law countries located in the middle.
Abstract: This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common-law countries generally have the strongest, and Frenchcivil-law countries the weakest, legal protections of investors, with German- and Scandinavian-civil-law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.

13,984 citations

Posted Content
TL;DR: The authors surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world, and presents a survey of the literature.
Abstract: This paper surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world.

13,489 citations


"Buy High, Sell Low: How Listed Firm..." refers background in this paper

  • ...More recent 2 For an extensive survey of the corporate governance literature, see Shleifer and Vishny (1997)....

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Journal ArticleDOI
TL;DR: Corporate Governance as mentioned in this paper surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world, and shows that most advanced market economies have solved the problem of corporate governance at least reasonably well, in that they have assured the flows of enormous amounts of capital to firms, and actual repatriation of profits to the providers of finance.
Abstract: This article surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world. CORPORATE GOVERNANCE DEALS WITH the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. How do the suppliers of finance get managers to return some of the profits to them? How do they make sure that managers do not steal the capital they supply or invest it in bad projects? How do suppliers of finance control managers? At first glance, it is not entirely obvious why the suppliers of capital get anything back. After all, they part with their money, and have little to contribute to the enterprise afterward. The professional managers or entrepreneurs who run the firms might as well abscond with the money. Although they sometimes do, usually they do not. Most advanced market economies have solved the problem of corporate governance at least reasonably well, in that they have assured the flows of enormous amounts of capital to firms, and actual repatriation of profits to the providers of finance. But this does not imply that they have solved the corporate governance problem perfectly, or that the corporate governance mechanisms cannot be improved. In fact, the subject of corporate governance is of enormous practical impor

10,954 citations