The Budget Execution Quality of Related Party Transactions: Evidence from Hong Kong

This paper proposes to use the related party transactions’(RPT)budget completion ratio(BCR)as indicator of RPT’s execution quality.This paper studies BCR by defining budget ceiling through RPTs announcement and comparing the amount disclosed in annual report as budget execution result.Through statistical analysis of 285 RPT announcements,we classify RPT’s BCR into four benchmark grades.This paper sums up the BCR of RPT from the samples,and deduces moral obligation and moral judgement curve(OJ curve)in terms of BCR.OJ curve is the real dynamic equilibrium after the struggle agency problems.From our statistical results,we verified that Weitzman’s ratchet effect exists in the budget formulation of RPTs,and it is a solid proof of Weitzman’s ratchet effect applied to real business scenarios.The empirical results show ratchet effect exists in BCR of RPTs before and after the change from GEM board listing to main board listing in Hong Kong(Transfer).This paper also finds that it is significant to find the estimated actual amount in the coming year through the budget completion ratio(BCR)of RPT from last year.This paper is a pioneer to examine the execution quality of RPT by the means of(i)Weitzman’s Truth Inducing Model,(ii)BCR,and(iii)SGR as well as(iv)estimated actual amount.

Usefulness and Effectiveness of Related Party Transactions （RPTs） Disclosure： Empirical Evidence From Italy

Related party transactions （RPTs） can be used by corporate insiders （e.g., managers, controlling shareholders） to expropriate corporate outsiders （e.g., minority shareholders）. We argue that effective disclosure of RPTs can eliminate or at least reduce expropriation phenomena by letting corporate outsiders assess the fairness of the transactions and identify the underlying conflicts of interest. We consider a sample of large RPTs carried out by listed corporations in Italy, a country that has been affected by significant corporate scandals in recent years. In particular, we analyse the content of several compulsory informative documents, required by CONSOB （the Italian Securities and Exchange Commission）, concerning large RPTs. The focus of our content analysis is on the ＂warnings＂ sections of these documents that should convey clear and comprehensive information on potential risks and conflicts of interest. Our empirical results show that, while the ＂warnings＂ sections of the studied documents generally contain all the information required by existing rules, the depth of the information provided is often unlikely to be sufficient to communicate the implications of the RPTs. Thus, readers may not find the disclosed information adequate to evaluate the fairness of the transactions. Moreover, visual representations are rarely used in the informative documents. The use of such representations could allow companies to convey the structures and features of complex RPTs in a simpler and more direct way.

Ownership Concentration and the Value Effect of Related Party Transactions （RPTs）

This paper investigates 218 related party transactions （RPTs） in Israel, an economy characterized by a high percentage of closely-held finns and identifies a non-linear inverted U connection between the value effect of RPT and the level of finn ownership concentration. This non-linear connection is similar to the worldwide documented quadratic （inverted U） relation between ownership concentration and a finn＇s Tobin＇s Q. The relation becomes even statistically stronger, when measuring ownership concentration using a strategic power approach, in an attempt to identify the source of this puzzling connection.

Post-issuance related party transaction： Evidence of tunneling

The distortion of corporate financing in China stock markets is not only reflected as the significant increase of leverage after rights offering, but also the large amount of post-issuance related party transactions between the parent SOEs and their subsidiaries. This paper examines the three channels, including accounts receivables, direct loan and loan guarantee. Empirical findings suggest that high frequency of these transactions after rights offering, and the amount of transactions increase as ownership concentration increases, which support the argument of tunneling.

Product market competition,ultimate controlling structure and related party transactions

Previous studies have shown that product market competition has an important effect on corporate strategies and internal governance mechanisms. Using a sample of China's listed firms from 2004 to 2009, we explore the relationship between product market competition and normal related party transactions and find a significant positive relationship. In addition, we investigate the substitutive effect of product market competition and the cash flow rights owned by ultimate controlling shareholders on the extent of normal related party transactions. In particular, our results suggest a positive relationship between the ultimate controlling shareholders' cash flow rights and normal related party transactions that is strongest in noncompetitive industries and weakens as product market competition increases.

Related party transactions and firm value: The moderating role of corporate social responsibility reporting

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.

Inquiry Letters and Tax Aggressiveness

This study examined the impact of inquiry letters on corporate tax aggressiveness based on the special inquiry system in Chinese stock exchanges.It found that the receipt of inquiry letters significantly inhibited tax aggressiveness.The channel through which inquiry letters worked involved a monitoring effect on related-party transactions.The disincentive effect of inquiry letters on corporate tax aggressiveness was mainly found in firms with overseas operations,low-quality of internal control,and weak tax enforcement.Examining the textual information in inquiry letters,the results show that more questions and the demand for a specific opinion from the auditor led to a greater disincentive effect.The level of detail in firms'reply letters weakened this disincentive effect.Finally,the disincentive effect of tax aggressiveness was more pronounced when inquiry letters pointed to tax-related issues.

How much control causes tunneling? Evidence from China

We study the dynamic causal effects of the shareholding ratio of controlling shareholder on tunneling behavior in China.We use control-right-transfers as the event to conduct the study.We obtain 394 control-right-transfer samples in China corporate control market from 2001 to 2008.We use related party transactions amount to capture control shareholders’tunneling activities,and make the following findings.Firstly,tunneling behavior is significantly affected by the shareholding ratio of controlling shareholder.Secondly,the relationship between tunneling and shareholding ratio of controlling shareholder takes an N shape(incline-decline-incline).There are at least two turning points in the relationship.Furthermore,firms with shareholding ratios of controlling shareholder that range from 34.46%to 39.01%(8.99–18.04%)exhibit the most(least)severe tunneling.Firm size is significantly positively related to tunneling activities.In addition,the shareholding ratios of the board and the tunneling activities are significantly negatively correlated.These findings imply the shareholding ratio decision of controlling shareholder in control transfers lead to agency problems manifested in China in a particular form of tunneling.