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|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|9282||2010||23 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Accounting and Public Policy, Volume 29, Issue 2, March–April 2010, Pages 115-137
We examine the stock market’s valuation of firms that disclose related party (RP) transactions compared to those that do not. We examine market values just prior to the Sarbanes-Oxley Act (SOX) ban on RP loans to evaluate the market’s perception of firms with RP transactions prior to regulatory intervention. We also evaluate subsequent returns to assess the RP firms’ overall risk return profile. We use the 2001 S&P 1500 to provide a large yet manageable hand-collected sample that predates SOX. Our market analysis suggests that RP firms have significantly lower valuations and marginally lower subsequent returns than non-RP firms. Market perceptions differ based on partitioning firms by RP transaction type and parties. The results are consistent with the market discounting firms that engage in simple RP transactions.
We examine the stock market’s valuation of firms that disclose related party (RP) transactions. A number of firms that engaged in recent high profile frauds also disclosed RP transactions in their financial statements. The United States Congress responded to this apparent association by banning RP loans to officers and directors as part of the 2002 Sarbanes-Oxley Act (SOX). Our study examines the market valuations of firms that disclose RP transactions in 2001 prior to the fraud revelations and Congressional ban to obtain an unbiased assessment of RP transactions. We also examine market returns in 2002 to evaluate whether our valuation findings represent an underlying risk and return association. Our pragmatic motivation to study RP firms stems from the Congressional ban on RP loans to officers and directors in section 402 the 2002 Sarbanes-Oxley Act (SOX).1 Congress did not appear to rely on any systematic research in deciding to ban RP loans.2 The ban’s inclusion in SOX suggests it was aimed at the recent frauds that involve RP transactions. For example, both Tyco and WorldCom provided and disclosed loans to executives, and Adelphia disclosed guaranteed related party debt and executive loans. While our research cannot decide whether Congress acted properly in banning these transactions, we can provide systematic evidence on the markets’ perception of RP transaction firms prior to the ban. We add to theory by investigating RP transactions to evaluate whether market valuations are consistent with (1) RP transactions being relatively benign transactions where their disclosure has little or no association with firm valuation or returns, (2) management or insider opportunism that results in lower firm valuations, or (3) the RP transactions being value-enhancing. Our study fits into a broader literature that examines the implications of “self-dealing” on firms and securities markets and the role of disclosure in mitigating the potential negative effects of self-dealing (Djankov et al., 2008). RP transactions have the potential for insiders to extract firm wealth at the expense of other stakeholders. In contrast, RP transactions can be value-enhancing by creating strategic partnerships, enhancing risk sharing, and facilitating contracting. The disclosure of RP transactions provides the market with the information necessary for investors to discipline opportunistic behavior. However, the ability to discipline behavior is not equivalent to the ability to prevent such behavior. Investors cannot directly prevent RP transactions. Investors are limited to voting with their feet by selling or refusing to buy the stock of RP firms, or ex post litigation against opportunistic insiders. Jensen and Meckling (1976) show an insider who owns less than 100% of the firm does not bear the full cost of his consumption of firm benefits. An insider can therefore engage in RP transactions with the firm that are more beneficial than costly to him, and investors who have taken price protection via lower demand for the stock have little reason to protest the transaction. As a result, equilibrium of RP transaction disclosure and lower firm valuation can exist.3 We review and classify RP disclosures from fiscal 2001 Form 10-Ks (annual reports) and definitive proxy filings for the 1194 firms included in the S&P 1500 that have sufficient data for our tests. We find 63% of the sample firms disclose RP transactions in their footnotes and/or proxy statements. We find a negative association between RP firms and their valuations. The market values RP firms approximately 8% lower than non RP firms. This result suggests differential valuation of firms disclosing RP transactions that is both statistically and economically significant. We also find that the market values residual income less for RP firms than non-RP firms. The residual income finding suggests investors place less reliance on reported income, and/or discount the return to shareholders from future income. Our analysis of subsequent stock returns documents that RP firms experience marginally lower stock returns in 2002. The returns findings imply that investors are not compensated for the lower RP market valuations with higher subsequent returns. We next consider whether all types of RP transactions have the same implications for valuation and returns. We classify the RP disclosures based on the nature of the transaction and the related party to the transaction (details of the classifications are provided in the Appendix). We group the detailed classifications into three broad categories – loans, other simple transactions and complex strategic transactions. We also classify the RP to the transaction by whether the transaction is with a director, officer, and shareholders (DOS) or with an unconsolidated investment of the firm.4 The market appears to value RP transactions based upon the type of RP transaction and the nature of the related party. Market valuations suggest that market views firms that disclose RP loans and other simple RP transactions with DOS negatively. In contrast, the disclosure of complex RP transactions and RP transactions with firm investments are not associated with valuations or returns. Overall, the evidence suggests that the market assigns lower values to firms that engage in relatively simple RP transactions including loans. In contrast, complex transactions with investments are not valued negatively.5 We are agnostic about whether our results suggest regulators are justified in banning these transactions for public companies. But, our results suggest that those involved in the corporate governance of individual firms consider carefully the potential market costs of entering into RP transactions. We complement related research by Gordon et al. (2004) and develop a richer understanding the market’s perception of RP transactions.6 Our research differs from theirs in a few important aspects. First, we include valuations as well as subsequent returns in our analyses. By incorporating valuation into our study, we show the negative returns documented by Gordon et al. are not the result of a risk and return relationship where high valuations result in low returns. Second, our sample of 1194 firms from the S&P 1500 provides more power and broader coverage.7 Finally, this additional data enables us to examine RP types which show that relatively simple transactions with DOS have greater negative valuation impacts than more complex transactions. Our approach provides insight into the market’s perception of differing RP transaction types. In addition, our research adds to Kahle and Shastri (2004) who document loans to executives are made at lower than market rates, and that loans made to managers related to stock and option transactions are relatively inefficient in increasing managers’ stock ownership. We also compliment the work of Cullinan et al. (2006) who document a significant association between loans to executives and financial misstatements. We show that on average, the market values firms that disclose loans to executives negatively consistent with an opportunistic interpretation of these loans. We also contribute to the emerging international literature on “self-dealing” that investigates the consequences of self-dealing on firms and markets. International evidence suggests that expropriation of assets (i.e. tunneling) by controlling parties damages minority shareholders which in turn reduces stock market values and returns for those firms that enter into such transactions (Johnson et al., 2000, Jiang et al., 2005 and Jian and Wong, 2010). The tunneling literature suggests the abuse of minority shareholders by controlling shareholders is commonplace in developing economies like China and is present in more sophisticated forms in developed countries (Johnson et al., 2000). At the stock market level, research suggests that laws that require disclosure of RP transactions are associated with better developed stock markets (Djankov et al., 2008 and La Porta et al., 2006). We contribute to the self-dealing literature by providing evidence that disclosure enables the market to respond to RP transactions by lowering the values of firms that engage in such transactions. We also contribute to the disclosure literature by documenting the value-relevance of RP disclosures (see Barth et al., 2001, Healy and Palepu, 2001 and Holthausen and Watts, 2001, for reviews of this literature). The paper proceeds as follows. First, we discuss related party transaction disclosure requirements. We then develop our hypothesis based on agency and contracting theories. We describe our sample and present a taxonomy of RP transaction types. Valuation and return effects of RP transactions are then presented and discussed followed by sensitivity analyses. The final section summarizes our findings.
نتیجه گیری انگلیسی
Overall, our results suggest that the market assigns lower values to firms that engage in certain types of RP transactions. We document both lower valuations and subsequent returns for RP firms. Further analyses exploring differences in transaction types suggest firms with simple transactions with DOS drive the negative valuation and returns findings. The RP loans banned by SOX appear to have particularly strong negative valuation implications, and marginal negative returns. However, the market generally does not appear to value more complex RP transactions or those involving a firm’s investments such as partnerships and joint ventures negatively. While proving that there is not some unidentified variable driving the association is not possible, our analysis suggests that no obvious underlying factor is driving the documented associations. Our sample imposes some limitations on our findings. First, we identify all the firms that disclose RP transactions. However, there may be firms that enter into but do not disclose RP transactions. In light of this limitation, our results are best interpreted as documenting a negative market valuation associated with the disclosure of RP transactions. Second, our findings with respect to complex RP transaction firms do not constitute clear evidence that the market values such transactions differently from simple transactions. The complex RP transaction disclosures range from very detailed revenue and expense disclosures to very high level summary discussions that exclude dollar amounts. It is possible that the wide range of disclosure quality leads to the minimal lack of association. Third, we examine the S&P 1500 which while important, represent only part of the market and as a result, caution should be taken not to over-generalize our findings. Finally, 2002 was a year in which RP transactions were in the press on a regular basis with respect to a number of high-profile frauds. This extensive media focus may have increased the market’s sensitivity to RP transactions. This risk is limited to the returns analysis as we examine 2001 valuations prior to the majority of the fraud announcements. Our findings raise some questions about both practice and theory. First, the market seems to treat firms with other simple RP transactions in a manner that is very similar to RP loans which leads us to question separate regulatory treatment for RP loans. But, our findings in general support separate consideration for different types of RP transactions especially for the types of transactions with investments and complex transactions. Regardless of the regulatory implications, our results suggest that those involved in corporate governance (i.e. board members) should carefully consider the potential market costs and the differential impact across RP transaction classifications when deciding whether or not to approve RP transactions. Second, the negative association between RP firms and both valuation and returns suggests that the market price protects against firms that engage in RP transactions, especially simple transactions. This result is somewhat surprising because the transactions are publicly disclosed and international research suggests that the US approach to self-dealing is stronger than most countries (Djankov et al., 2008). We believe our findings can be reconciled with the international research and expectations about disclosure. First, disclosure provides the necessary information for the market to value RP transactions. Without disclosure, the market would not be able to separate RP firms from other firms. Second, we document a significant but modest decline in RP firm value. This modest level of price protection suggests that RP transactions are value relevant. Further, the modesty of the decline is consistent with the argument that disclosure on average inhibits insiders from more damaging transactions that would lower firm valuations even more. Third, it may be that contracting alone cannot entirely overcome the threat of management opportunism. Corporate insiders have considerable power with respect to RP transactions, including what types of contracts the firm enters into and the monitoring mechanisms that are in place. As Jensen and Meckling so eloquently point out, once a manager owns less than the full firm, he has strong incentives to consume firm resources, because he does not bear the full cost of the consumption. Our paper suggests there is a market-based cost to this consumption. However, it may be that from the related parties’ perspective, the market cost does not offset the personal gain to the RP transaction. Furthermore, the market may not have any reason to discipline the behavior after it has taken price protection in the form or lower valuations and returns. The resulting equilibrium suggests a moderate dead-weight loss to the market as whole that neither stockholders nor management are motivated to fix.