Regulation and Disclosure Requirement for RPT in Indonesia
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Enforcing and implementing the laws and the rules are quite a challenge. The Corporation Law is just issued in August 2007, thus the enforcement and
implementation of the Law remain to be seen. Further, with regard to Bapepam- δK‘s
requirement of independent shareholders‘ approval for certain RPT, in practice only few RPTs about 10 transactions per year during 2001
– 2007 obtain approval from minority shareholders. Thus, before 2007, the majority of RPT were unchecked by
parties independent to the transaction, except if a firm voluntarily establishes such policy. Even though shareholders may file a lawsuit against a companyBODBOC, in
practice it is difficult to do, possibly due to requirement of having at least 10 voting shares andor due to the lengthy and inefficient judicial process.
The following explains the disclosure requirement regarding PRT for public companies in Indonesia. Public companies have to disclose their RPTs in the
financial statements semi-annually in accordance with the Indonesian Accounting Standard and Bapepam Rule VIII.G.7. The Bapepam disclosure requirement is quite
detail, e.g., disclosing the amount of assets, liabilities, sales, and expenses arising from RPT, disclosing the parties involved in RPT and their relationship with a firm for
transactions above USD 100,000, and disclosing that the price and term of transactions are in accordance with arms‘ length transactions. Conflict of interest
transactions requiring approval of independent shareholders also have to be disclosed in detail to the public while other conflict of interest transactions have to be
reported to Bapepam-LK. Information that should be disclosed are: Explanation about the transaction: transaction value, related parties, and the
nature of the conflict of interest. Report from independent party about the transaction.
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Confirmation about the transaction relative to the same transaction which does not contain conflict of interest.
Statement from SB and BOD that all material information is being disclosed truthfully.
Report from an expert or independent consultant, if it is required by Bapepam LK.
In addition to PSAK and Bapepam-LK rules about RPT, public firms are also required to disclose material information about events that could affect stock price or investors
decision, not more than two days after the events appear Bapepam LK X. K. 1 rules. The events include RPT and others like mergeracquisition, stock splitdividend,
significant new productinnovations, significant changes on management, etc. Bapepam IX. E. 2 rule about material transactions requires that if a firm plans to
conduct material transaction, then it has to be announced to public, not more than 28 days before shareholders meeting that will approve or refute that plan.
From the above explanation, our study concludes that before the enactment of the new corporation law in 2007, regulations regarding control mechanism to prevent
abusive RPT are relatively weak since approval process other than from independent shareholders is not regulated. The disclosure requirement in financial statements,
however, is relatively adequate since firms have to provide detail information regarding RPT. Disclosure requirement regarding material transactions including
RPT is also adequate since companies have to publish detail information regarding the transaction.
4. Hypothesis and Research Design 4.1 Hypothesis
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In this study we employ a logistic regression to investigate the effect of CG practice, proportion of majority ownership, and financial leverage on the probability of RPT
that a priori to expropriate occur. The dependent variable of this study is a dummy variable of RPT that taking a value of one if the RPT is a priori to expropriate, and
else zero.
The monitoring mechanism that we employ to investigate their impact on the probability of RPTE is CG components as internal monitoring mechanism and
financial leverage as external monitoring mechanism. We utilize the following CG components: rights of shareholders and key ownership functions, equitable treatment
of shareholders, disclosure and transparency, and the responsibilities of the board and examine whether these components could reduce the probability of RPTE.
Gordon 2003 investigates the relationship between RPT and CG mechanism like board characteristics, CEO par performance sensitivity, and external monitoring and
finds that weaker CG mechanism being associated with more dollar amount RPT. Moreover, a study by Kohlbeck and Mayhew 2004 fin
d that board of director‘s independency i.e., strong CG is associated with lower amount of RPT, and if RPT
occurs, this transaction tends to be transparently publicized. Consistent with their views and findings, we hypothesize that better practice of CG associates with lower
occurrence of RPTE.
We apply the same logic of the influence of CG practice to financial leverage, i.e., if external monitoring is high, then the probability of RPT that a priori to expropriate will
be low. Gordon et al. 2003 make use of financial leverage as a proxy for external monitoring, i.e., higher financial leverage positively associates with more intensive
external monitoring. An external institution e.g., a bank that provides loan to a
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company will monitor activities of the firm, and it will refute something such as abusive RPT that could decrease the firm‘s value. Consistent with the expectation,
their study finds that higher leverage associates with lower occurrence of RPT. Kohlbeck and Mayhew 2004 also use financial leverage as a proxy for external
monitoring of a firm, applying the same argument as Gordon 2003. However, they find no relationship between leverage and the probability of RPT that a priori to
expropriate occur. Based on Gordon et al 2003 argument, we hypothesize that higher financial leverage reduces the likelihood of RPTE.
Capulong et al. 2000 state that there are two possible impact of concentrated ownership. First, the majority shareholder could play monitoring role against
management, or it could be that the majority shareholder use his or her ownership to conduct RPT. Thus, if the ownership on the firm is concentrated, then it would be
easier for firm to conduct RPT, including abusive RPT. However, higher proportion of majority of ownership may also trigger more oversight from the regulator that is
aware of higher likelihood of conducting RPT for firms with more concentrated ownership. In addition, higher ownership implies that majority shareholders‘ share of
loss due to expropriation is also higher, making it less likely for them to conduct abusive RPT. Further, because RPT has two conflicting impact it could be employed
to expropriate or to provide benefit, then we make no prediction with regard to the effect of proportion of majority sh
areholders‘ ownership on the probability of RPT that a priori to expropriate.
4.2 Empirical Model The following two models are employed to test the hypothesis:
Dummy RPT
mt
= +
1
RiS +
2
EtS +
3
DT +
4
ResB +
5
PROP +
6
δEV +
7
SIZE
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Dummy RPTmt = +
1
TotCG +
5
PROP +
3
δEV +
4
SIZE Where:
Dummy RPT
mt
= value 1 if RPT is a priori to expropriate, else zero, RiS
= Rights of shareholders, EtS
= Equitable treatment of shareholders, DT
= Disclosure and transparency, ResB
= Responsibility of the board, PROP
= Majority shareholders ownership, LEV
= Financial leverage, SIZE
= Market capitalization, TotCG
= total CG scores. In the second model, we employ Total CG which comprises of the four principles of CG.
Size is utilized as a control variable.
4.3. Sample Selection and Data Collection Announcements on corporate action are used to collect RPT sample based on the
seven types of corporate announcements: General Meeting of Shareholders GMS, Results of GMS, Merger and Acquisition, Issuance of Shares, Advertisement of
Summary of Prospectus, Material Transactions, Takeover Offer. These announcements usually state that the parties with whom firms conducting
transaction are their subsidiaries, shareholders, affiliated firms, parties who have conflict of interest, and management. If on the announcement there is no information
about the relationship, then we explore this relationship in the firm‘s notes to financial statements. Our initial samples of RPT are 216 samples. Because the
same transaction could be announced in a different corporate action, then we treat
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them as one unit sample. We also eliminate sample based on data availability. Our final samples of RPT are 163 samples.
This RPT sample is classified based on three classification categories of Cheung et al 2006. However, in this study, we put the third category into the second category,
which is RPT that could benefit the minority shareholders. Table 1 provides a description of the sample composition. Sample of RPT that a priori to expropriate
minority shareholder is 102 unit sample and sample of RPT that could benefit the minority shareholders is 61 unit sample. The majority RPTs are with subsidiaries
which in most cases are not subject to independent shareholders‘ approval.
Table 1. Description of Sample Composition Description
Number of Sample
RPT Sample Classification Based on The Relationship Between The Parties:
1. Subsidiaries
2. Shareholders
3. Affiliated
4. Director and Management
5. Unidentified
Total 95
19 22
13 14
163
Sample of RPT that a priori to expropriate and RPT that a priori benefit minority shareholders:
1. RPT that a priori to expropriate
Asset Acquisition
Asset Sales
Equity Sales
Trading Relationships
Cash Payment
Unidentified, but conflict of interest