Corporate governance, size and disclosure of related party. Indonesia is a developing country with characteristics such as low level of investor protection, low level of law enforcement and. The relative frequency of disclosed related party transaction combined with. On the other hand, rpts may be considered a mechanism to exploit company resources as a consequence of existing conflicting interests. Such related sales propping is more prevalent among stateowned firms and in regions with weaker economic institutions. Our sample covers listed companies at the indonesian stock exchange during. Pdf download for promoter ownership, related party transactions and firm. Our sample covers listed companies at the indonesian stock exchange during 2005. Related party transactions rpts can have a dual nature. We also find that these abnormal related sales are not entirely accrualbased but can be. How are investors protected from relatedparty transactions. Rpts are widespread and are part of every business group activity. Current asset tunneling through related party transaction.
The purpose of this paper is to investigate the phenomenon in china of listed companies propping up their reported earnings through the use of abnormal related. Review and approval of related party transactions all credit and noncredit related party transactions go through the normal approval processes of the company given the delegated discretion after due consideration to existing dosri regulations and sb limits. Promoter ownership, related party transactions and firm. Purpose the purpose of this paper is to investigate the phenomenon in china of listed companies propping up their reported earnings through the use of abnormal related. In general, the relative frequency and value of different types of related party transactions by chinese listed firms are similar to the ones reported for hong kong firms by cheung et al. Propping through related party transactions by ming jian.
Abstract this study uses a comprehensive sample of listed firms in china from 2001 to 2004 to provide evidence of tunnelling and propping via related lending. Minority shareholders in these firms seem to be subject to expropriation through tunneling but also gain from propping. Relatedparty transactions american university of beirut. Evidence from connected party transactions in hong kong article in journal of financial economics 822. Related party transactions with foreign affiliates.
We examine a sample of connected transactions between hong kong listed companies and their controlling shareholders. The purpose of this paper is to investigate the phenomenon in china of listed companies propping up their reported earnings through the. This problem concerns the phenomenon of the ultimate controlling shareholder expropriating tunneling or injecting propping funds through related party transactions rpts in a way that prejudices the rights of minority shareholders. Prejudicial relatedparty transactions of listed companies in. Using the universe of korean chaebol firms with available data during the period. The effect of chinas securities regulations maggie p. New evidence on determinants and firm value abstract we extend the existing literature on related party transactions from a domestic to an international dimension and uncover new evidence of resource transfer by fdi firms to their foreign affiliates through overseas related party transactions.
Propping acts by controlling shareholders are common in chinese listed firms. Related party transactions and financial performance. Minority shareholders in these firms seem to be subject to expropriation through tunneling but also gain from propping up. What types of connected transactions lead to expropriation of minority shareholders.
This paper examines empirically the effects of related party transactions hereafter rpts on future stock price crash hereafter crash risk in china. Does the market anticipate the expropriation by firms. Sep 20, 2008 based on a sample of chinese listed firms from 1998 through 2002, this paper documents that listed firms prop up earnings by using abnormal related sales to their controlling owners. Loans to related parties were the most frequent type of related party transaction, followed by payments to company officers for either unapproved or nonexistent services. Related party transactions of loans, receivables and asset tunneling have negative effect on firm value. Pricewaterhousecoopers 2010, ifrs student manual 2010, cch. A related party transaction is a transfer of resources, services, or obligations between related parties, regardless of whether or not a price is. Relatedparty transactions rpts refer to transactions between a company and its related entities such as subsidiaries, associates, joint ventures, substantial shareholders, executives, directors and their relatives, or entities owned or controlled by its executives, directors, and their families. State ownership, the institutional environment, and auditor choice.
The impact of related party transactions on performance and. Evidence of tunnelling and propping in china fei guo a. Resmed related party transaction policy and procedures. Internal control and related party transactions through related party transactions, cash and profits can be diverted away from firms either to controlling shareholders or to assist troubled firms within the group jian and wong 2004. Propping by controlling shareholders, wealth transfer. Guide on fighting abusive related party transactions in asia oecd. Firms engaged in related party transactions to perform earnings management in order to smooth the firms. We hand collect the related party transactions conducted between nonfinancial listed firms and government agencies from 2008 to 2014.
For example, controlling shareholders loot their own firms during the emerging market crisis of 1997 to 1998. Through related party transactions, cash and profits can be diverted away from firms either to controlling shareholders or to assist troubled firms within the group jian and wong. Negative effects are mitigated to a certain degree by stronger. Evidence from connected transactions in china abstract friedman et al. In doing so, controlling chaebol families transfer the cost of propping to outside minority shareholders. The listing agreement also requires a listed company to adopt a policy setting out the manner in which the company will deal with related party transactions as well as the. The definition of related party substantially includes controlling shareholders, directors and. Prejudicial relatedparty transactions of listed companies in china. Propping through related party transactions with ming jian. Tunneling, propping and expropriation evidence from connected party transactions in hong kong abstract we examine a sample of 328 filings of connected transactions between hong kong listed companies and their controlling shareholders during 19982000. Pdf related party transactions and firm value in the.
Abusive related party transactions where a party in control of a company enters into a. Related party transactions and stock price crash risk. Do firms benefit from related party transactions with foreign affiliates. Rpts are also associated with earnings management, propping, and tunneling. On one hand, these transactions may be considered sound business exchanges, fulfilling the economic needs of the company. Estimating the extent of propping in china and how it is. Abstractrelated party transactions rpts either bring efficiency in. Related party transactions, investments and external financing. The purpose of this paper is to investigate the phenomenon in china of listed companies propping up their reported earnings through the use of abnormal related party sales. This cited by count includes citations to the following articles in scholar. Related party transactions and corporate value joebm. The effect of tunneling and propping related party transactions trpt and prpt on firm performance q 116 table 5. Tunneling, propping and expropriation evidence from.
Propping by controlling shareholders, wealth transfer and firm. Propping acts by controlling shareholders are common in chinese listed. The listing agreement as defined below also defines related parties and related party transactions and prescribes the corresponding approval requirements. Almost all public companies in indonesia perform related party transactions ratna, 20. Internal control, related party transactions and corporate. An example would be the acquisition or disposal of a business with a related party. Often used as a means of tunneling or propping, rpts are likely to be conducted with prices, volume, and conditions different from those in arms length. Raghavendra rau, and aris stouraitis, tunneling, propping and expropriation. This study aims to investigate whether a corporate governance cg practice has a negative impact on size of related party transactions rpts. This problem concerns the phenomenon of the ultimate controlling shareholder expropriating tunneling or injecting propping funds through relatedparty transactions rpts in a way that prejudices the rights of minority shareholders. Corporate propping through relatedparty transactions. Propping through related party transactions propping through related party transactions jian, ming.
Based on a sample of chinese listed firms from 1998 through 2002, this paper documents that listed firms prop up earnings by using abnormal related sales to their controlling owners. We first carefully read the background of counterparts of the related party transactions and manually identify the related party transactions with government agencies. Relatedparty transactions and financial statement comparability. Tunneling, propping and expropriation evidence from connected. The definition of related party substantially includes controlling shareholders, directors and every other group which can exercise a. Request pdf propping through relatedparty transactions based on a sample of chinese listed firms from 1998 through 2002, this paper documents that. Propping through relatedparty transactions request pdf. Propping by controlling shareholders, wealth transfer and. Using a discrete classification of firms into four pyramidal layers, chaebol families use related party sales to prop up firms in the third layer following the crisis, perhaps at the expense of central firms. We also find that these abnormal related sales are not entirely accrualbased but can be cash. Value relevance, earnings management, and related party. Evidence from korea abstract we extend the existing literature on related party transactions rpts from a domestic to an international dimension and uncover new evidence of resource transfer by fdi firms to their foreign affiliates through overseas rpts. Feb 01, 20 read corporate propping through related.
Do firms benefit from related party transactions with foreign. Related party transactions rpts are defined as a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged ias 24. Full text views reflects the number of pdf downloads, pdfs sent to. The result suggests that large firms have the high amount of rpts with tunneling effect and the market penalizes them. Analyzing market reaction to a report of rpt, evidence of tunneling is found mainly through excessive direct compensation to a related party and evidence of propping through other type of transactions such as transfer of assets and buyingselling of goods and services. Sep 20, 2008 propping through related party transactions propping through related party transactions jian, ming. In this paper, we use data on relatedparty transactions of all listed chinese firms from 2002 to 2008 to investigate the motivation behind controlling shareholders propping acts and subsequent wealthtransfer behavior and how both affect firm performance. Evidence from korea abstract we extend the existing literature on related party transactions rpts from a domestic to an international dimension and uncover new evidence of resource transfer. In this paper, we use data on relatedparty transactions of all listed chinese firms from 2002 to 2008 to investigate the motivation behind controlling shareholders. Raghavendra raub, aris stouraitisc acity university of hong kong, 83 tat chee avenue, kowloon tong, hong kong, peoples republic of china. On average, firms announcing connected transactions earn. This study investigates whether abnormal related party transactions as a proxy of.
The area of corporate governance that deals with minority shareholder protection is underresearched. Related party transactions with government agencies. In this paper, we use data on relatedparty transactions of all listed chinese. Related party transactions and minority shareholder rights oecd. Finally, we find that related party transactions representing tunneling are accompanied by significantly less information disclosure compared to related party transactions representing propping. Corporate governance mechanism plays a deterring role to tunneling. The mandatory disclosure of internal transactions, which are called connected transactions or related party transactions rpts, between a publicly listed. A related party transaction is a transaction between the company and any related party or a transaction in which the related party has, or will have, a direct or indirect interest, including any transactions required to be disclosed pursuant to item 404 of regulation sk under the securities exchange act of 1934, other than. Research on the phenomenon of propping up a firms earnings or liquidity by its controlling shareholders through relatedparty transactions rpts has suffered from arbitrary and unsettled measures of the propping variable and a lack of theoretically underpinning. We examine a sample of related party transactions between chinese publicly listed firms and their controlling shareholders during 20012002.
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