Research Design and Hypothesis Development

618 Corporate Governance CG principles suggested by the Organization of Economic Cooperation and Development OECD. The instrument consists of 117 items. Each item is rated ‗poor‘ scored one, ‗fair‘ scored two, and ‗good‘ scored three depending on whether the item is properly practiced based on information publicly disclosed in 2005. The total CG score is calculated as a weighted average of the score of each component. RPT disclosure is represented by the availability of value of transaction in the announcement. A dummy variable DDISCL takes the value of one if the announcement provides information on the value of the transaction, else zero. Ownership structure is measured by the percentage of majority ownership, management board of directors ownership, and foreign ownership. As a control variable, t he study employs company size,. measured by the log of firm‘s market capitalisation. Hyptheses development As discussed earlier, RPT has two contradictive nature. It can be viewed as transaction with expropriation potentials resulting in negative market reaction, but it can also be viewed as an efficient transaction that can lower costs, resulting in postive market reaction. Because of that, market reaction to RPT announcement can be either positive or negative: H1: RPT announcement can have a positive or negative relation to the cummulative abnormal return Further, the study expects that market reaction to the announcement of RPT is affected by the practice of corporate governance in the company, the level of disclosure in each announcement, and the ownership structure. If the practice of corporate governance is good, it will enhance supervision and monitoring of RPT, so 619 that at the end, RPT that actually occurrs more likely is RPT that increases effectiveness and efficiency of the firm. Therefore, higher CG Score should result in more positive market reaction toward RPT relative to Non-RPT announcement. H2: The relation between CAR and RPT announcement is more positive if CG Score increases Disclosure of the value of transaction is a proxy of overall disclosure of transaction. Higher disclosre in the announcement of transaction shows company‘s good intention to provide information and assure sufficient disclosure to shareholders and other stakeholders. If the intention of the transaction is for efficiency reason, then there is nothing to hide, with the consequence of higher disclosure level. As a result, disclosure of the value of transaction should result in more positive market reaction toward RPT relative to Non-RPT announcement. . H3: The relation between CAR and RPT announcement is more positive with disclosure of value of transaction. The increase of ownership interest by majority shareholders and by board of commissioners increase the control right as well as cashflow right of the majority shareholders. Accordingly, higher control right makes them easier to conduct RPT. As discussed earlier, RPT can result in positive or negative market reaction depending on how market evaluates the RPT. Market can evaluate RPT as a tool to expropriate minorit y shareholders‘ wealth or to increase efficiency and effectiveness of operations. H4: The relation between CAR and RPT announcement is influenced by ownership interest of majority shareholders. 620 H5: The relation between CAR and RPT announcement is influenced by ownership interest of the board of commissioner Assuming foreign investors are more sophisticated than domestic investors in term of their monitoring ability, the existence of foreign investor in a company will increase monitoring and supervision on RPT so it is more likely that RPT occurring is the one that increases the efficiency of company‘s operation. Thus, higher foreign investors ownership should result in more positive market reaction toward RPT relative to Non- RPT announcement. H6: The relation between CAR and RPT announcement is more positive with the increase in ownership interest of foreign investor Sample selection Unit analysis in this study is listed company with corporate action during the period of 2005 – 2007. Corporate action data is obtained from Indonesian Stock Exchange, data is also gathered from Bisnis Indonesia. Criterias for sample selectrion are:  Companies listed in Indonesian Stock Exchange  Companies with corporate action  Corporate action can be identified as RPT or non-RPT and with or without transaction amount  Available share prices during the event windows  Available financial statement and annual report  Available ownership data from financial statement 621 Corporate action identification  This study covers only types of corporate actions that has the potentials for RPT, i.e: Annual Shareholders‘s εeetings ASε, result of the ASε, Issuance of shares without preemptive rights, Disclosure on issuance of shares without preemptive rights, Short prospectus on issuance of shares, Tender offer, Merger, and Material Transaction. Regression Model The empirical model to test the hypothesis is as follow. To control for heteroscedasticity, the regression is run using White heteroscedasticity consistent covariance matrix. CAR i k,l = b + b 1 DRPT i + b 2 CGI i + b 3 DDISCL i + b 4 PROP i + b 5 BOC i + b 6 DFOR i + b 7 CGRPT i + b 8 DDISCLRPT i + b 9 PROPRPT i + b 10 BOCRPT i + b 11 DFORRPT i + b 12 LOGMKT i CAR = market reaction to corporate action announcement DRPT = types of transaction dummy; 1=RPT, 0=non RPT CGI = CG Score BOC = ownership interest of the board of commissioners DDISCL = disclosure of the amount of transaction dummy; 1=disclosing the amount, 0=not disclosing the amount PROP = ownership interest of the majority shareholders DFOR = foreign ownership dummy; 1=majority shareholder is a foreign company, 0=majority shareholder is a domestic company CGRPT = interaction of CG and DRPT 622 BOCRPT = interaction of BOC and DRPT PROPRPT = interaction of PROP and DRPT DFORRPT = interaction of DFOR and DRPT DDISCLRPT = interaction of DDISCL and DRPT LOGMKT = size as a control variable In addition to including CGI, BOC, DDISCL, PROP and DFOR as moderating variables,, the study also includes them as independent variables. A study by Black 2001 states that CG practice has a positive relation to value of the firm. Thus, higher CG score may result in higher CAR.CG principles require accurate and timely disclosure of company‘s information such as financial position, performance, ownership structure, corporate governance application, and RPT. Higher disclosure reduces the degree of asymmetric information which may result in higher CAR. A study by Capulong et.al. 2000 states that in company with highly concentrated ownership, majority shareholders have a significant role in supervising the management, that will be positively responded by the market. But as the ownership gets more concentrated, it will increase the ease with the majority shareholders can authorize an RPT. This condition can have dual effect to market reaction. The same goes to management ownership. Lastly, it is commonly known that foreign ownership increases supervision and monitoring, that will be positively responded by the market.

3. Result and Discussion

Size of RPT in Indonesia Analysis on the financial statements of listed companies in the Indonesian Stock Exchange during 2005 – 2007 shows that transactions involving related parties are quite substantial relative to the book value of equity. The data are as follow: 623  Ratio of RPT assets and RPT liabilities compared to total equity:  42 in 2007, 48 in 2006, and 43 in 2005  Ratio of RPT sales and RPT expenses compared to total equity:  87 in 2007, 65 in 2006, and 84 in 2005. Based on the above statistics, we can conclude that RPT is relatively high in listed companies in the IDX. Considering that listed companies in Indonesia mostly have highly concentrated ownership, this result provides evidence that the degree of concentration of ownership structures affects frequency and size of RPT. Analysis on RPT regulation in Indonesia 83 Regulation about RPT in Indonesia focuses on several key issues:  Public companies are required by Bapepam-LK to disclose information on RPT in audited Financial Statements. Details that should be disclosed include: o Assets, liabilities, sales, and purchases that involved RPT and their percentage to total assets, total liabilities, total sales, and total purchases o If transaction amount or ending balance of the above-mentioned account is more than one billion rupiahs, the amounts or balances should be disclosed separately and relation with that specific party mentioned. o Character, nature, and components of RPT. o Pricing policies and transaction requirements, and information whether or not the pricing policies and transaction requirements are similar with those of third parties o Reasons and assumptions on the creation of allowance for doubtful account to RPT receivables. 83 For a more in- depth analysis with Indonesia‘s experience with managing RPT, please refer to Utama 2008.