Related party transactions and corporate governance
01 Dec 2004-Vol. 9, pp 1-27
TL;DR: In this paper, the authors explore two alternative perspectives of related party transactions: the view that such transactions are conflicts of interest which compromise management's agency responsibility to shareholders as well as directors' monitoring functions; and a view that these transactions are efficient transactions that fulfill rational economic demands of a firm such as the need for service providers with in-depth firm-specific knowledge.
Abstract: Transactions between a firm and its own managers, directors, principal owners or affiliates are known as related party transactions. Such transactions, which are diverse and often complex, represent a corporate governance challenge. This paper initiates research in finance on related party transactions, which have implications for agency literature. We first explore two alternative perspectives of related party transactions: the view that such transactions are conflicts of interest which compromise management’s agency responsibility to shareholders as well as directors’ monitoring functions; and the view that such transactions are efficient transactions that fulfill rational economic demands of a firm such as the need for service providers with in-depth firm-specific knowledge. We describe related party transactions for a sample of 112 publicly-traded companies, including the types of transactions and parties involved. This paper provides a starting point in related party transactions research.
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TL;DR: In this article, the authors used a dataset from a sample of 85 French firms over the period 2002-2008 to answer the following questions: Is there any relation between the use of auditors with a brand-name reputation for providing high-quality audit reports and the number of related-party transactions (RPTs) reported to outside shareholders? And, how does a more transparent environment for the reporting of relatedparty transactions affect this relationship, if at all?
Abstract: SUMMARY: We use a unique dataset from a sample of 85 French firms over the period 2002–2008 in order to answer the following questions: Is there any relation between the use of auditors with a brand-name reputation for providing high-quality audit reports and the number of related-party transactions (RPTs) reported to outside shareholders? And, how does a more transparent environment for the reporting of related-party transactions affect this relationship, if at all? We find that firms audited by Big 4 auditors report fewer related-party transactions. The period under study includes the change in accounting standards in Europe that occurred in 2005 with the adoption of IFRS standards, which resulted in a more transparent reporting environment for RPTs. We find that the negative relationship between auditor reputation and the number of reported of RPTs is “weaker” in a more transparent reporting environment. We argue that these results are related to the accounting uncertainty surrounding the reporting of...
33 citations
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TL;DR: In this paper, the authors investigate the frequency, nature, and valuation consequences of related party transactions for a sample of firms in four industries and find evidence that firms in which key executive positions are handed down to family members have lower valuations.
Abstract: Related party transactions are potential mechanisms for insiders to expropriate outside shareholders via self-dealing; however, there are also possible benefits to these arrangements for outside shareholders. This paper investigates the frequency, nature, and valuation consequences of related party transactions for a sample of firms in four industries. The evidence suggests that, on average, related party transactions are not harmful to outside shareholders. However, the average results obscure the fact that while transactions that pre-date a counterparty becoming a related party appear to be innocuous at worst, transactions initiated after a counterparty becomes a related party are associated with reduced shareholder wealth. We also find evidence that firms in which key executive positions are handed down to family members have lower valuations.
32 citations
Cites background from "Related party transactions and corp..."
...…has primarily focused on the characteristics of firms that report RPTs. Consistent with a negative perception of RPTs, Kohlbeck and Mayhew (2004) and Gordon, Henry, and Palia (2004) conclude that U.S. firms reporting significant RPTs also tend to exhibit “weaker corporate governance practices.”...
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...Mayhew (2004) and Gordon, Henry, and Palia (2004)....
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TL;DR: In this article, the authors used a unique data set with a sample of 85 French firms over the period 2002-2005 to test the prevalence of audit quality to reduce the number of related-party transactions.
Abstract: Regulators, standard setters and market participants consider related party transactions a major problem in financial markets. The quality of external auditing may be proposed as an important governance mechanism to alleviate the propensity of insiders to use related party transactions. We test the prevalence of audit quality to reduce the number of these transactions. We consider that audit quality is positively correlated with audit reputation. We use a unique data set with a sample of 85 French firms over the period 2002-2005. The French legal system allows us to concentrate on the reputation dimension of audit firms, as a motivation that mitigates the propensity of insiders to initiate related-party transactions. The results show that high quality external audit firms reduce significantly the frequency of related-party transactions. The effect of audit quality seems to be the most important variable explaining the frequency of related-party transactions. These results are obtained after controlling for the selection bias related to the choice of external auditors, using a two-step Heckman procedure.
32 citations
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19 Apr 2011TL;DR: In this article, the authors investigated the relationship between related party transactions (RPTs), corporate governance, and firm performance and found that related transactions are detrimental to shareholders and thus reducing firm performance, but the negative effect is mitigated with the presence of good governance.
Abstract: This chapter investigates the relationship between related party transactions (RPTs), corporate governance, and firm performance. Specifically, this chapters examines the moderating effect of corporate governance on the RPTs–performance relationship. On the basis of 448 firm-year sample for 2005–2007, we find evidence that related transactions are detrimental to shareholders and thus reducing firm performance. However, the negative effect is mitigated with the presence of good governance, namely level of board independence and executive remuneration. Furthermore, we find auditor size as an external governance mechanism could also reduce the negative impact of RPTs.
31 citations
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TL;DR: In this article, the influence of related party transactions (RPTs) on firm value was investigated, and the authors found that related party payables have a positive relationship with firm value.
Abstract: This study investigates the influence of related party transactions (RPTs) on firm value. Further, it examines whether a firm’s corporate social responsibility (CSR) reporting reflects its corporate values and ethical concerns, therefore mitigating the value-destroying effects of RPTs. Based on 274 observations from publicly listed firms in Indonesia, our results show that RPTs (i.e., related party sales) are negatively related to firm value. Further, we find that in the presence of better CSR reporting, the relationship between RPTs and firm value becomes more positive. This is in line with the view that CSR reporting, which reflects firms’ ethical concerns, may serve as a mechanism against managers’ opportunism. However, we find that related party payables have a positive relationship with firm value. Further investigation reveals that, although certain RPTs show a short-term, value-enhancing effect, these transactions seem to result in subsequent tunneling activities, suggesting managerial opportunism in the long term.
29 citations
References
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TL;DR: In this article, the authors draw on recent progress in the theory of property rights, agency, and finance to develop a theory of ownership structure for the firm, which casts new light on and has implications for a variety of issues in the professional and popular literature.
49,666 citations
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TL;DR: The authors argue that the separation of decision and risk-bearing functions observed in large corporations is common to other organizations such as large professional partnerships, financial mutuals, and nonprofits. But they do not consider the role of decision agents in these organizations.
Abstract: ABSENT fiat, the form of organization that survives in an activity is the one that delivers the product demanded by customers at the lowest price while covering costs.1 Our goal is to explain the survival of organizations characterized by separation of "ownership" and "control"-a problem that has bothered students of corporations from Adam Smith to Berle and Means and Jensen and Meckling.2 In more precise language, we are concerned with the survival of organizations in which important decision agents do not bear a substantial share of the wealth effects of their decisions. We argue that the separation of decision and risk-bearing functions observed in large corporations is common to other organizations such as large professional partnerships, financial mutuals, and nonprofits. We contend that separation of decision and risk-bearing functions survives in these organizations in part because of the benefits of specialization of
14,045 citations
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01 Jan 1932TL;DR: Weidenbaum and Jensen as mentioned in this paper reviewed the impact of developments not fully anticipated by Berle and Means, such as the rise of the service sector, and the significant role played by institutional investors in the owner/manager equation.
Abstract: This monumental work on the corporation is one of those enduring classics that many cite but few have read. Graced with a new introduction by Weidenbaum and Jensen, this new edition makes this classic available to a new generation. Written in the early 1930s, The Modern Corporation and Private Property remains the fundamental introduction to the internal organization of the corporation in modern society. Combining the analytical skills of an attorney with those of an economist, Berle and Means raise the central questions, even when their answers have been superseded by changing circumstances. The book's most enduring theme is the separation of ownership from control of the modern corporation and its consequences. Berle and Means display keen awareness of the divergent interests of directors and managers, and of each from owners of the firm. Among their predictions are the characteristic increase in size of the modem corporation and concentration of the economy. The authors view stock exchanges and stock markets as essential by-products of the rise of the modem corporation, and explore how these function. They address the difficult questions of whether corporations operate for the benefit of owners or managers, and explore what motivates managers to make effective use of corporate assets. Finally, they examine the role of the corporation as the prevailing form of organizing the production and distribution of goods and services. In their new introduction, Weidenbaum and Jensen, co-directors of the Center for the Study of American Business at Washington University, critically assess the impact of developments not fully anticipated by Berle and Means, such as the rise of the service sector, and the significant role played by institutional investors in the owner/manager equation. They note the authors' prescient observations, including the complex role of and motivating influences on professional managers, and the significance of inside information on stock markets. As they note, The Modern Corporation and Private Property remains of central value to all those concerned with the evolution of this major social institution of the twentieth century. Scholar and practitioner alike will find it of enduring significance.
10,159 citations
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TL;DR: In this article, the authors explain how the separation of security ownership and control, typical of large corporations, can be an efficient form of economic organization, and set aside the presumption that a corporation has owners in any meaningful sense.
Abstract: This paper attempts to explain how the separation of security ownership and control, typical of large corporations, can be an efficient form of economic organization. We first set aside the presumption that a corporation has owners in any meaningful sense. The entrepreneur is also laid to rest, at least for the purposes of the large modern corporation. The two functions usually attributed to the entrepreneur--management and risk bearing--are treated as naturally separate factors within the set of contracts called a firm. The firm is disciplined by competition from other firms, which forces the evolution of devides for efficiently monitoring the performance of the entire team and of its individual members. Individual participants in the firm, and in particular its managers, face both the discipline and opportunities provided by the markets for their services, both within and outside the firm.
8,222 citations
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TL;DR: In this paper, the authors show that standard errors of more than 3.0% per year are typical for both the CAPM and the three-factor model of Fama and French (1993), and these large standard errors are the result of uncertainty about true factor risk premiums and imprecise estimates of the loadings of industries on the risk factors.
6,064 citations
"Related party transactions and corp..." refers methods in this paper
...We define industries following Fama and French (1997)....
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