Not All Related Party Transactions (RPTs) Are the Same: Ex Ante Versus Ex Post RPTs

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 predate 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.

Tax Avoidance, Related Party Transactions, Corporate Governance and the Corporate Cash Dividend Policy

“…Most previous studies focused on investigating the effects of CG's moderation on RPT relationships with market reactions (Cheung et al (2006); Utama et al (2010); Ryngaert and Thomas (2012)) or company values (Kohlbeck and Mayhew (2010); Utama & Utama (2014); Elkelish (2017)). Koestaman and Diyanti (2013) have tested the effect of CG's moderation, but on the relationship between family ownership and cash dividend payouts.…”

Disclosure on Related Party Transactions: Evidence from Italian Listed Companies

“…Some studies suggest that, on average, RPTs are not harmful to outside shareholders (Ryngaert & Shawn, 2011). This observation can be extended to the other classes of stakeholders .…”

Accounting Irregularities in Related Party Transactions

“…In the positive view of RPTs, RPTs are perceived as value-enhancing mechanisms that are designed to improve efficiency in an organization. RPTs as value-enhancing mechanisms have been discussed from the perspective of efficient transaction [2], contracting efficiency [3], bonding mechanisms [4] and institutional needs [5]. In the negative view of RPTs, RPTs are perceived as a form of private benefits of control, which is used as a mean of transferring firms" wealth to the controlling shareholders (or management) at the expense of other stakeholders.…”

“…In the negative view of RPTs, RPTs are perceived as a form of private benefits of control, which is used as a mean of transferring firms" wealth to the controlling shareholders (or management) at the expense of other stakeholders. The abusive perspective of RPTs have been discussed according to the principal-agent conflict theory [2], expropriation mechanisms [4], and opportunistic and non-opportunistic Accounting Irregularities in Related Party Transactions Akmalia M. Ariff and Hafiza A. Hashim behavior [3].…”

“…In [3] RPTs are categorized into two types; ex-ante RPTs and ex-post RPTs and different predictions are set on their effect. Ex-ante RPTs are transactions that originate before a firm becomes a publicly traded entity or before the counterparty becomes a related party, whereas ex-post RPTs are transactions that occur after the firm goes public and after the counterparty to the transaction obtains related party status.…”