Controlling Shareholder Ownership Structure and Conflict-Related Party Transactions

Abstract

Concentrated companies offer various types of shareholding structures either direct, indirect, or pyramidal ownership. The opportunist controlling shareholders may intend to utilize the complex nature of indirect and pyramidal shareholding to engage in related party transactions (RPT) by concealing or hiding their related party identity. We examine the association between controlling shareholder's shareholding structure (direct shareholding (DCS), indirect shareholding (INDCS), and pyramid shareholding (PYRCS)) and RPT in Malaysia. Based on a sample of 580 companies listed on Bursa Malaysia from 2013 to 2017, we found that the controlling shareholders utilize all types of shareholding (DCS, INDCS, and PYRCS) to engage with RPT. These findings support the argument that the controlling shareholder is at the privilege to manipulate the various type of shareholding to get personal benefit through RPT. The findings also indicate that controlling shareholders with INDCS or PYRCS disclose a lower magnitude of RPT-conflict rather than controlling shareholders with DCS. We provide an important implication for capital market regulators to strengthen approval procedures or guidelines for RPT, especially upon the concentrated ownership. Also, regulators such as the MSWG may increase minority shareholder's awareness of the possibility of conflict-RPT behind the RPT among related party companies. The findings might be helpful for users to understand the relationship between controlling shareholders and RPT in other developing countries with similar governance and culture attributes to Malaysia.

Related party transactions and earnings management in family firms: the moderating role of board characteristics

“…Empirical research provides evidence of the propension for business group owners to transfer profits from companies where they have low cashflow rights, to companies where they have high cashflow rights (Bertrand et al, 2002). The controlling shareholder in a JFBM 14,1 business group may exploit different types of shareholding structures (direct, indirect and pyramidal ownership) in order to gain private benefits via RPTs, making it harder to identify the related party (Ali et al, 2021). Furthermore, the literature, basing on quantitative analysis methods, suggests that transactions with related parties may be either a substitute (El-Helaly et al, 2018) or a complement to EM practices (Thomas et al, 2004;Marchini et al, 2018), as well as a standalone tool to manipulate earnings (Chen et al, 2011).…”

The moderating role of audit quality and firm size in the effect of corporate governance on related party transactions: Evidence from Indonesia

“…The globalization of business groups adds to the agency problem, as management requires a commensurate increase in discretionary power. This development needs proper corporate governance frameworks for business groupings to ensure management and shareholder interests are aligned (Rasheed et al, 2019;Saleh, 2021). Despite the importance of corporate governance factors in developing multinational corporations, relatively few literature sources have explored various governance factors that can affect RPTs in emerging markets.…”

“…Bad governance is correlated with poor financial reporting, including earnings manipulation, restatements, and fraud (Hasnan et al, 2016). Saleh (2021) and Tambunan et al (2017) argue that there are two RPTs hypotheses: the propping up and the internal capital market. For propping, it is intended to support the performance of business groups by transferring funds from stronger companies to companies that need capital in one business group.…”

“…However, related party transactions tend to be abusive rather than positive if they are not controlled by corporate governance with the support of stakeholders. RPTs have been identified as direct indicators of wealth exploitation (Saleh, 2021;El-Helaly, 2018). The OECD's latest summit emphasized that Asian nations should adopt a comprehensive strategy to monitor and regulate abusive RPTs as a threat to corporate governance in the region.…”

Market value and related party's transactions: a panel data approach

“…On the contrary, the conflict of interest hypothesis argues that related parties utilize their power to expropriate corporate resources for their Market value and related party's transactions advantage, increasing agency costs and diminishing firm value (Fooladi and Farhadi, 2019). RPTs are considered as direct indicators of wealth exploitation (El-Helaly, 2018;Saleh, 2021). Opportunistic management conduct was an essential aspect in asset theft and providing false financial statements in the latest scams at Health South, Enron and other businesses (Swartz and Watkins, 2003).…”