Result and Discussion Proceeding E Book 4A Turky

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. 624  Certain RPT that involves conflict of interest should gain approval from the independent shareholders before it can be done.  Listed companies should provide disclosures and information, especially on significant RPTs and on RPTs with conflict of interest  The new company law in 2007 Undang-Undang No. 40 Perseroan Terbatas requires directorscommissioners that are involved in conflict-of-interest transaction cannot decideapprove the transaction. The approval should come from other directorscommissioners who are not involved with the transaction. If all directorscommissioners are involved, then shareholders should appoint an independent party to make decision regarding the transaction.  The company law also enables minority shareholders to file lawsuit against directorcommisionercompany for a loss caused by negligience or intentional fraud. Directors Commissioners Controlling shareholders may also personnaly liable they abuse their power to to their advantage at the expense of other parties such as minority shareholders. Based on our analysis, the RPT regulation in Indonesia has provide adequate protection for all shareholders against potential negative effects of RPT. Indonesia is the only country in Asia that requires approval from independent shareholders in the case of RPTs with conflict of interest. With regard to firm s‘ compliance to disclosure requirement, the study analyzes the level of RPT disclosure based on the disclosure requirement by Bapepam-LK explained earlier. There are 10 items to be disclosed and each item is checked whether it is disclosed or not. A score of one is given if it is disclosed, zero otherwise. Thus, if firms disclose all items, the maximum score will be ten. The results are as as follow: 625  RPT Disclosure in Financial Statements:  81,23 in 2007, 78,9 in 2006, and 79,88 in 2005 The results indicate that the level of compliance to RPT disclosure requirement is relatively good. However, not all disclosure items are complied. Majority of the firms more than 50 did not disclose pricing policies and transaction requirements of RPT, while the information is crucial for investors to evaluate the fairness of the transactions. With regard to independent shareholders approval, between 2001 – 2007 there were approximately 70 transactions obtained independent shareholders, which were relatively small compared to the size of RPT transactions in Indonesia. Thus, the approval processes of majority of RPT during the period were up to the firms. After the enactment of company law in 2007, companies have to follow the article with regard to conflict-of-interest transaction; thus, the impact of this law on RPT remains to be seen. Further, RPT regulations in Indonesia are not without flaws. The regulations are lacking in term of empowerment and legal support toward their implementation. Indonesia do not have special body or court that can put on trial a company that is proven to have violate the regulations. From this point of view, Indonesia is still behind other coutries in Asia such as Malaysia, Taipei, Thailand, and Vietnam. 626 Sample From a total of 2,449 corporate action in 2005 – 2007, only 716 fulfill the requirements of RPT and non-RPT identifications. After that, the selected samples is further analysed based on redundancy and RPT potentials. This second filtering provides us with 177 RPT samples and 190 non-RPT samples. After data availability consideration, we gathered a final sample of 148 corporate actions, 70 of which are RPTs and the rest 78 samples are non-RPT. Empirical Results The following table provides statistic descriptive of the dependent and independent variables. Table 1. Statistic Descriptive CAR DRPT CGI DDISCL PROP BOC DFOR LOGMKT Mean -0,004 0,473 0,629 0,432 0,499 0,331 0,385 11,554 Standard Error 0,011 0,041 0,006 0,041 0,013 0,017 0,040 0,109 Median -0,004 0,000 0,625 0,000 0,510 0,333 0,000 11,745 Standard Deviation 0,135 0,501 0,074 0,497 0,160 0,201 0,488 1,326 Sample Variance 0,018 0,251 0,005 0,247 0,026 0,040 0,238 1,757 Minimum -0,570 0,000 0,490 0,000 0,074 0,000 0,000 4,834 Maximum 0,676 1,000 0,837 1,000 0,949 0,857 1,000 13,521 Count 148 148 148 148 148 148 148 148 The average CAR is 0.4 and is not significantly different from zero. Thus, on average the market does not react to corporate announcements. The occurrence of RPT DRPT has mean value of 0.473; from 70 out of the total sample of 148. This indicates that almost half of corporate actions are RPTs. Considering the nature of ownership structure of companies in Indonesia, the result is not surprising. The 627 average CG practice is 62.9, indicating that CG practice in Indonesia is still relatively inadequate. For the occurrence of disclosure of corporate action DDISCL, the mean value is 0.432; with 64 companies out of the total sample 148 provide disclosure of value of transactions on corporate action. Value of transaction is one key information needed by investors to evaluate the impact of the transaction to firm value, thus, this result shows an inadequate transparancy of listed firms in IDX. The proportion of majority ownership in companies in Indonesia PROP has a mean value of 49.9, with minimum and maximum amount of 7.4 and 94.9, respectively. This result is, again, not surprising, and showing that the tendency of ownership structure in companies in Indonesia leans toward high percentage of majority ownership. Ownership interest of the BOC averages around 33.1 with minimum and maximum amount of 0 and 85.7, respectively. The table also indicates that from total sample 148, 64 of them have a foreign majority ownership. Table 2 provides correlation analysis among variables. All independent variables do not have significant correlation with CAR. CGI has a positive correlation with DRPT, a negative correlation with BOC, and a positive correlation with LOGMKT. The positive correlation with DRPT is quite a surprise; however, if majority of RPTs are for efficient purpose, then the positive correlation should be expected. Proportion of ownership by majority shareholder PROP has a positive correlation with DRPT, suggesting that higher ownership makes it easier for majority shareholder to conduct RPT. As expected, PROP also has a positive correlation with BOC. Table 2. Correlation Analysis CAR DRPT CGI DDISCL PROP BOC DFOR CGRPT DRPT Pearson Correlation 0.105 Sig. 2-tailed 0.203 N 148 628 CAR DRPT CGI DDISCL PROP BOC DFOR CGRPT CGI Pearson Correlation -0.056 0.162 Sig. 2-tailed 0.503 0.049 N 148 148 DDISCL Pearson Correlation 0.055 -0.035 0.026 Sig. 2-tailed 0.507 0.675 0.754 N 148 148 148 PROP Pearson Correlation 0.115 0.206 0.038 -0.067 Sig. 2-tailed 0.164 0.012 0.645 0.417 N 148 148 148 148 BOC Pearson Correlation -0.062 -0.023 -0.243 0.11 0.206 Sig. 2-tailed 0.453 0.78 0.003 0.184 0.012 N 148 148 148 148 148 DFOR Pearson Correlation -0.12 0.085 0.029 0.01 -0.118 -0.046 Sig. 2-tailed 0.145 0.307 0.729 0.905 0.152 0.575 N 148 148 148 148 148 148 CGRPT Pearson Correlation 0.084 0.985 0.293 -0.04 0.205 -0.069 0.089 Sig. 2-tailed 0.31 0.628 0.013 0.401 0.283 N 148 148 148 148 148 148 148 LOG MKT Pearson Correlation -0.111 0.044 0.315 0.071 -0.088 -0.094 0.108 0.088 Sig. 2-tailed 0.178 0.596 0.39 0.288 0.254 0.193 0.288 N 148 148 148 148 148 148 148 148 Table 3 provides the regression result. The result has no possible multicollinearity problems since the Variance Inflation Factors for all independent variables are below 10. Table 3. Regression result Variable Coeff. Prob. DRPT 0,33924 0,03710 CGI 0,06672 0,58070 BOC -0,04873 0,42640 DDISCL -0,02708 0,26570 PROP 0,14891 0,06850 DFOR -0,00875 0,71200 CGRPT -0,42983 0,10580 BOCRPT -0,13645 0,29060 DDISCLRPT 0,10967 0,02390 PROPRPT -0,06387 0,63380 DFORRPT -0,03161 0,47670 LOGMKT -0,00834 0,15950 R 2 = 12.27 Adjusted R 2 = 5.17 629 Study by Gordon, Henry, dan Palia 2003 states two hypotheses for the nature of RPT. The first hypotheses, the conflict of interest hypotheses, claims that RPT is a transaction with tendency toward expropriation of minority shareholders‘ wealth. The second hypotheses, the efficient transaction hypotheses, claims that RPT can fulfill basic economic needs of corporation with its ability to decrease cost of transactions. Hypotheses of this study is RPT announcement can have a positive and negative market reaction Result from table 3 supports the efficient transaction hypotheses. There is a positive and significant relation between RPT announcement and market reaction to that announcement at 5 significance level. With this result, we can conclude that in general market reacts positively toward RPT announcement because they view RPT as transaction to be more efficient than Non-RPT and thus can increase value of the firm. The finding is contradictory to the findings of Utama 2006 and Masuroh 2000 who find a relatively more negative reaction toward RPT than Non-RPT. There are several plausible reasons for this contradictory results: 1. The period of studies of Masuroh 2000 and Utama 2006 covers earlier years before 2005 than the current study. There may be structural changes e.g., more regulation, more stringent enforcement over time that may affect the results. Thus, this possibility warrants further research that cover longer period. 2. This study covers broader corporate action than their studies, which are limited only to investment decisions. This may imply that non-investment decisions are less likely to be employed as means to expropriate than investment decisions. Table 3 also provides evidence of a positive and significant relation between DDISCLRPT and CAR, supporting hypothesis 3. Disclosing the value of transaction 630 indicates management‘s good intention of transparency toward shareholders and other stakeholders. Disclosing the value of transaction also reduces asymmetric information regarding the transaction. Therefore, market reaction to the disclosure is positive. The study finds that corporate governance practice does not have any impact on the relation between RPT and CAR, as shown by the insignificant coefficient of CGRPT. The result suggests that in Indonesia, corporate governance practice is not yet effective in controlling RPT that might be detrimental to a firm. However, one reason that may explain the insignificant result is the measurement of CG practice. As mentioned earlier, CG Score is based on five principles of Corporate Governance, including the principle of taking into account the interest of stakeholders. This principle is not related to the internal control mechanism in a firm, including internal control related to RPT. Thus, future study may need to come up with a more refined measure of CG that covers only internal control of a firm. All ownership structure variables are not significant, implying that ownership structure does not have any role in controlling RPT.

4. Conclusion

With regard to regulation on RPT in Indonesia, we conclude that in general the regulation is relatively adequate. The regulation includes  Listed companies in Indonesia is obliged to disclose detail RPT information in Financial Statement  RPT with conflict of interest should gain approval parties not involved with the transactions.  Certain RPTs require approval from independent shareholders. 631  DirectorsCommissionersControlling Sharholder can be held personally liable for causing loss to a firmminority shareholders as a result of RPT transaction.  Under certain condition, minority shareholders may file lawsuit against directorscommissionerscontrolling shareholders for any wrongdoing. However, Indonesia still lacks legal empowerment against violation of RPT and CG regulation. The study finds that in general, market views RPT as more beneficial than non-RPT. Further, market appreciates more disclosure on RPT. Thus, the study recommends regulatory body to enforce the compliance of listed firms to disclosure requirement. On the other hand, we also find that CG practice is not yet effective in controlling RPT and ownership structure does not have any effect on the nature of RPT. The study has some limitations that deserve mention. The study covers only three years, thus future study needs to extend the period of the study. The proxy for CG practice may be too broad so it does not capture the role of CG in controlling RPT. Therefore, future studies may need to develop a more refined measure of CG. Future study may also need to distinguish RPT into several types as suggested by Cheung 2006 and test whether the reaction is contingent upon the types of RPT. RPT may also be categorized into type of business decisions, such as investment, financing, or operating decisions and future study may investigate whether the type of business decision affects the market reaction.