Concluding Remarks Proceeding E Book 4A Turky

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The reaction is positive when the market expects that RPT is more efficient than Non-RPT while it is negative when the market perceives RPT as a way to expropriate wealth of non-controlling shareholders. This study also investigates whether the effect of RPT on stock market reaction depends on corporate governance practice, ownership structure, and disclosure level. Empirical study on corporate announcements in 2005 – 2007 finds a more positive reaction toward RPT than non-RPT, suggesting that in general RPT provides a more efficient way to conduct transaction than non-RPT. The study also finds that higher disclosure level magnifies the positive stock price reaction toward RPT. Keywords: related party transaction, market reaction, corporate governance, ownership structure, disclosure level

1. Introduction

The extent of stock market growth in a country depends on the existance of equitable treatment of all shareholders, including minority and foreign shareholders, regardless of their ownership level. The practice of equitable treatment of all shareholders is one of the principles of corporate governance Organization for Economic Co-operation and Development OECD, 2004. In Indonesia, and in several countries in Asia, many listed companies have ownership structures that are still concentrated. Majority shareholder owns a large portion of company‘s outstanding shares and have controlling interest over the company. On the other hand, the level of public ownership is relatively low. Further, majority shareholder typically also controls other firms and this condition increases potential occurance of related party transactions ―RPT‖. RPT under IAS 24, is ―.. a transfer of resources, services, or obligations between related parties, regardless of whether a price is charged .‖ IAS β4, par. 9. 613 RPT can have a positive or negative impact on firm performance Gordon, Henry and Palia, 2003. The efficient transaction hypothesis. suggests that RPT can fulfill basic economic need of a company by lowering cost of transaction so that company can be more efficient. RPT has its own positive influence in the day-to-day business operation and to the general economy. Assurance to the occurrence of RPT is relatively high compared to those of third party transactions. Further, since the transaction is under common control, transaction cost of RPT is also lower than those of third party transactions. Having these two reasons, it is no surprise that companies, especially those under common control, commonly conduct RPT. On the other hand, the conflict of interest hypothesis pertain to RPT as transactions with the tendency toward expropriation of minority shaholders‘ wealth. This kind of RPT usually occur in companies with low corporate governance mechanism and low adjusted stock return. Consistent with the hypothesis, McCahery and Vermeulen 2006 conclude that even though RPT can play a positive role for companies, fraudulent and abusive RPT may exist whereby controlling shareholders‘ wealth is maximized at the expense of minority shareholders. A study by Johnson, et.al. 2000 find that in companies with concentrated ownership, majority shareholder can expropriate the wealth of minority shareholders in many ways. They can gain additional cash by selling assets, goods, or services to the company trough RPT at prices above the market prices; they can obtain loans with agreeable terms; they can transfer assets between companies under their control; and at worse, they can dilute the ownership of minority interest. Consistent with these two opposing views, Cheung, et.al. 2006 classify RPT into: i transactions that are a priori likely to result in expropriation of company‘s minority shareholders, ii transactions likely to benefit company‘s minority shareholders, and iii transactions that could have strategic rationals and perhaps are not expropriation.