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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Banking & Finance, Volume 33, Issue 5, May 2009, Pages 914–924
We examine a sample of 254 related party and arms’ length acquisitions and sales of assets in Hong Kong during 1998–2000. Our analysis shows that publicly listed firms enter deals with related parties at unfavourable prices compared to similar arms’ length deals. Firms acquire assets from related parties by paying a higher price compared to similar arms’ length deals. In contrast, when they sell assets to related parties, they receive a lower price than in similar arms’ length deals. With the exception of audit committees, corporate governance characteristics have limited impact on transaction prices. Firms with audit committees on their boards pay lower prices to related parties for acquisitions and receive higher prices from related parties from divestments.
What is the process through which controlling shareholders extract resources from publicly listed companies that they control? Most of the academic literature on tunneling has attempted to measure expropriation using indirect proxies for the propensity of firms to expropriate (see for example, Bertrand et al., 2002, La Porta et al., 2000a, La Porta et al., 2002 and Faccio et al., 2001). These papers do not identify specific channels through which tunneling might occur. A second stream of literature examines the market reaction experienced by the publicly listed firm when they announce different types of related party transactions (see for example, Cheung et al., 2006, Baek et al., 2006 and Bae et al., 2002). These studies show that the shareholders of publicly listed firms that are subject to tunneling experience a reduction in firm value. They assume that investors are able to accurately predict the implication of the related party transaction for the value of the public firm. It is however unclear that the reduction in firm value is entirely due to the related party transaction. For example, suppose investors cannot accurately predict the impact of the related party transaction to the value of the public firm. Instead, they perceive it as a signal of bad corporate governance, and mark down the values of all companies that engage in such transactions. A recent article in the Wall Street Journal titled “Even good insider deals raise doubts” commented “… Such related party transactions raise questions about whether corporate insiders are fully focused on the interests of shareholders, experts say. The deals, no matter how small, can create the impression that an insider is using company assets for personal benefit, and that the company is getting the short end of the stick. …”1 Cheung et al. (2006) show that firms that conduct value-destroying related party transactions continue to decline in value for up to 12 months following the transaction, suggesting that investors penalize these firms for much more than the information contained in the related party transaction announcement. It is therefore an open question exactly how related party transactions serve as channels through which expropriation might occur. In this paper, we attempt to answer this question by comparing the price at which controlling shareholders conduct asset transfers with the companies they control in related party transactions with the fair value of the assets, in a sample of 140 asset acquisitions (78 from related parties and 62 from arms’ length non-related third parties) and 114 asset sales (51 to related parties and 63 to arms’ length third parties) by Hong Kong publicly listed firms during 1998–2000. Our main variable of interest is the difference between the transaction price and the “fair” value of the assets changing hands. Since the traded assets in the related party and the arms’ length transactions in our sample are not public companies, they have no observable market value. Hence our analysis draws on research which suggests that earnings and book values serve as important determinants of the economic value of a firm’s assets (Copeland et al., 2000, Ohlson, 1995 and Collins et al., 1997). Specifically, we use a methodology which assumes that the fair value of the assets to the buyer or seller can be estimated as a function of the accounting book value and past operating earnings of these assets. After controlling for the operating performance and the industrial classification of the traded assets, we show that publicly listed firms sell assets to their controlling shareholders at a discount relative to the price of similar arms’ length (non-related) transactions. At the same time, publicly listed firms acquire assets from their controlling shareholders at a premium relative to the price in similar arms’ length transactions. In other words, controlling shareholders appear to benefit directly at the expense of publicly listed firms by selling assets to them at above market prices and by acquiring assets from them at below market prices. Corporate governance variables have limited impact on the pricing of the deal. Only firms with an audit committee on their board and firms with a large analyst following conclude related party transactions at more favourable prices. We find no support for an alternative hypothesis that these transactions are driven by tax management considerations rather than expropriation. Prior papers on specific mechanisms, such as related party transactions, through which tunneling occurs have focused on the pricing of loans obtained by related parties. We extend this literature by analyzing how tunneling occurs in other types of related party transactions, such as asset acquisitions or sales. The Hong Kong market is appropriate for conducting this research because it is dominated by firms with concentrated ownership, providing us with a large representative sample of related party asset transfers. In addition, disclosure of detailed information about related party transactions is mandated in the listing rules of the exchange. The remaining of the paper is organized as follows: The next section briefly reviews the literature on tunneling. Section 3 describes the data. Section 4 describes our valuation methodology. Section 5 reports our empirical results. Finally, Section 6 discusses our conclusions.
نتیجه گیری انگلیسی
Our analysis shows that publicly listed firms enter into deals with related parties at unfavourable prices compared to similar arms’ length deals. More specifically, firms acquire assets from related parties paying a higher price than in similar arms’ length deals. In contrast, they sell assets to related parties receiving a lower price than in similar arms’ length deals. Therefore, related party transactions appear to transfer resources away from the minority shareholders of publicly listed firms and directly to the hands of their controlling shareholders who appear to benefit directly from these transactions. The presence of an audit committee on the firm’s board appears to limit the expropriation. Firms with audit committees pay lower prices to related parties for acquisitions and receive higher prices from related parties from divestments. Other corporate governance characteristics have limited impact on the price. We base our analysis on transaction prices rather than firm value. The market value of firms that conduct related party transactions may decline – even if the market cannot accurately predict the implication of the related party transaction to the value of the firm – if investors perceive related party transactions as a signal of bad corporate governance and mark down the values of all companies that engage in such transactions. In contrast, our aim is to show that the controlling shareholders receive direct benefits from these related party transactions. Our analysis of transactions prices should be seen as complementary to a growing body of tunneling literature which shows that related party transactions are detrimental to the value of minority shareholdings. One potential criticism of our analysis is that we use accounting figures to approximate the value of the traded assets and accounting figures may be subject to manipulation. However, the use of accounting figures should not bias our results. To the extent that the controlling shareholders are in better position to manipulate the accounting figures that they report compared to arms’ length parties, they have incentives to conceal expropriation. Therefore, the potential presence of accounting manipulation will bias our results towards not finding expropriation.