معاملات مربوط به حزب و اداره شرکت ها: شواهدی از بازار سهام تایوان

In this study we explore how corporate governance affects the level of related-party transactions (RPTs) and how it moderates the motives of using RPTs in Taiwan, an ownership-concentrated economy. The empirical results show that good corporate governance is effective in constraining RPTs with the negative relation being sustainable across different measures of RPTs (raw, residual and industry-adjusted RPTs) and across different types of RPTs (related sales, lending and guarantee, and related borrowings). The propping-up hypothesis indicates that the level of related sales is positively correlated with the condition that firms plan to issue seasoned equity next period and the condition of a decrease in the reported earnings. The internal capital market hypothesis indicates that the level of related lending and guarantee (related borrowing) is negatively (positively) correlated with the condition of an increase in capital expenditure and an increase in net working capital. The empirical results lend partial support to the two hypotheses. More importantly, we find that corporate governance moderates the relation between the motives and the level of RPTs.

Controlling owners can expropriate wealth from minority shareholders through various ways, such as self-dealing transactions, preferential loans, transfer assets, and acquiring additional shares at a preferential price (Johnson et al., 2000). However, most anecdotal evidence is indirect ( e.g. Bertrand et al., 2002, La Porta et al., 2000, La Porta et al., 2002, Claessens et al., 2002 and Faccio et al., 2001), and the findings so far are mixed to vindicate that minority shareholdings lose value as a result of specific expropriation actions (e.g. Bae et al., 2002 and Buysschaert et al., 2004). Related-party transaction (RPT) has emerged as direct evidence of wealth exploitation (e.g. Cheung et al., 2006 and Berkman et al., 2009). A recent forum launched by OECD specifically indicates that Asian economies should adopt a comprehensive approach to monitoring and curbing abusive related party transactions which represent the most pervasive challenge of corporate governance for Asian countries. Moreover, the case of Enron in which shareholders sustain burdensome losses resulted from RPTs (Thomas, 2002) further portrays the importance of this issue. Since then, it is not uncommon for disgruntled dissident shareholders to argue that the RPTs are unfair to outside shareholders (Battaglia, 2000). In the US case, the Securities and Exchange Commission (SEC) proposed amended disclosure rules as to mandate that either a firm's audit committee or another independent body of directors review and approve all RPTs. RPT could be further decomposed into several sub-categories with one for each being explored separately. For example, Berkman et al. (2009) indicate that the issuance of loan guarantee is unambiguously a tunneling practice. Tunneling, as per Liu and Lu (2007) definition, is like a wealth expropriation from minority shareholders by controlling shareholders. In practice, it is more prominent in the cases when listed companies transfer profits out to other listed or unlisted related entities. Lo et al. (2010) focus on related-party sales to distort financial statements leading to greater information asymmetry and a general erosion of confidence in the firm. In this study we firstly explore the relation between corporate governance and the level of RPTs. Corporate governance, as manifested in ownership and boardroom structure represents the governance style and has been proven to be effective in alleviating opportunistic behaviors of management, improving reporting quality, and increasing firm value.1 It has been used to help explain different corporate policies.2 We hypothesize a negative relation between corporate governance and the level of RPTs because good corporate governance mechanisms should enhance the fairness among the different stakeholders in the business (Collier and Esteban, 1999, Jensen, 2005 and Matten and Crane, 2005). The argument is in line with Lo et al. (2010) who find that the quality of corporate governance is important in deterring the use of manipulated transfer prices in related-party sales transactions. In this study we propose two alternative hypotheses and relate them to the use of RPTs. The first one is the propping-up hypothesis arguing that RPTs are used to prop up underperforming firms (Friedman et al., 2003). Jian and Wong (2010) show that Chinese listed firms use related sales to their controlling owners to prop up earnings. Bertrand et al. (2002) and Jian and Wong (2010) document that when there are incentives to meet earnings targets, related sales are used to dampen the effects of negative industry shocks on listed firms' earnings. We postulate two conditions that are related to the level of related sales for the purpose of propping up earnings: a plan to issue seasoned equity in the next period and a decrease in reported earnings. That is, the motive of propping earnings is strong when firms plan to issue seasoned equity in the next period and find that the reported earnings deteriorate. Therefore, the level of related sales is supposed to be positively correlated with condition of issuing equity shares and negatively correlated with the change in earnings per share. Moreover, if corporate governance plays a positive function, it should moderate the relation between the conditions and related sales. Specifically, the interaction between corporate governance and the condition of issuing seasoned equity is negatively correlated with related sales, and the interaction between corporate governance and the change in earnings per share is positively correlated with related sales. The other hypothesis relating to RPTs is the internal capital market hypothesis which is derived from the transaction cost theory of Coase (1937) and Williamson (1964). This hypothesis implies that RPTs are used to replace external arm-length markets. There are benefits and costs associated with internal capital market. The benefits include better utilization and allocation of assets, better coordination among different activities, quicker feedback, deeper reciprocal knowledge, and a reduction of the hold-up problems. Nevertheless, there are costs associated with internal capital markets including the rent-seeking behavior on the part of division managers (Scharfstein and Stein, 2000) and inefficient allocation of resources (Scharfstein, 1998). These costs mainly derived from agency costs are supposed to be mitigated under a good governance structure. In this study we postulate that related lending and guarantee and related borrowing are related to the function of internal capital market. Firms that have internal capital needs, as manifested in an increase in capital expenditure and an increase in new working capital, are associated with a low level of related lending and guarantee and a high level of related borrowing. In contrast, firms that have abundant operating cash flows are associated with a high level of related lending and guarantee and a low level of related borrowing. The empirical results lend partial support to this hypothesis. More importantly, we find that corporate governance moderates the relation between conditions of internal capital market and the level of related lending and guarantee (related borrowing). In this study we use the sample of listed firms in Taiwan to explore the issue. The merits of using this sample are summarized as follows. First, Taiwan is characterized as an economy of ownership concentration. A high percentage of the listed firms (77.2%) are with an identifiable controlling owner who tends to be the founder or founding family. This implies that the level of related party transactions in aggregate is a good proxy of the related party transactions associated with the controlling owners. Moreover, related-party transactions are commonly seen among firms within a business group, and probably much more common than that in China that has been extensively explored (e.g. Jian and Wong, 2010 and Lo et al., 2010). The prevalence in use merits an exploration to locate the factors that affect the level of related-party transactions. The empirical results are easily summarized. First, quality of corporate governance is negatively correlated with the level of RPTs with the negative relation being sustainable across different measures and types of RPTs. Moreover, the propping-up hypothesis and the internal capital market hypothesis received partial supports that the conditions relating to the hypotheses are related to the level of RPTs. Third, corporate governance moderates the relation between the conditions and RPTs. This study bears some similarities with prior ones while adds new insights to the existing literature. First, like Lo et al. (2010) we find a negative relation between corporate governance and related party transactions. Unlike their specific focus on board structure and transfer pricing, we investigate corporate governance and related party transaction from a broader perspective in the sense that corporate could be disentangled into sub-items or be integrated into a composite index and that related party transactions could be itemized into related sales, related lending and guarantee, and related borrowings. The negative relation between corporate governance and related party transactions remains sustainable for the analysis in aggregation and the analysis in itemization. In other words, our analysis is robust to vindicate the negative relation between corporate governance and related party transactions. Another work that resembles to this study is found in Jian and Wong (2010) that abnormal related sales are used as a surrogate for the propping up hypothesis. However, their analysis jointly addresses the tunneling hypothesis and the propping hypothesis indicating that abnormal related sales are used for meeting earnings targets. Since these abnormal related sales can be cash-based, there is significant cash transfer via related lending from listed firms back to controlling owners. Our findings lend partial supports to both hypotheses. The potential contributions of this study are illustrated as follows. First, we systematically investigate RPTs by breaking down into sub-categories and propose factors that potentially affect the level of usages. The structure of analysis is much comprehensive to cover a broad scope of related party transactions and factors that relate to the level of related party transactions than prior studies (e.g. Jian and Wong, 2010, Lo et al., 2010, Bertrand et al., 2002 and Berkman et al., 2009). Second, we propose hypotheses with each hypothesis corresponding to different subcategories of RPTs. More importantly, we illustrate conditions to map with the corresponding hypothesis. Third, we illustrate the function of corporate governance in ameliorating the level of related-party transactions and in moderating the relations between the conditions and the level of RPTs. Forth, we use alternative measures of RPTs ranging from raw data, residual model, and industry-adjusted model so as to enhance robustness of the empirical results and to portray the “abnormal” level illustrated in Gordon et al. (2007). The rest of this paper is organized as follows. Section 2 briefly introduces the RPTs in Taiwan. Section 3 reviews literature and develops empirical hypotheses. Section 4 describes the data. Section 5 reports the empirical results. Section 6 is the robustness check. Section 7 concludes.

Recent studies examining expropriation of minority shareholder wealth implicitly assume that weaker corporate governance increases the probability of tunneling, which, in turn, reduces firm value. In this study we identify that a good governance structure could ameliorate firm's use of RPTs as manifested in the subcategories of related sales, related lending and guarantee, and related borrowings. The negative relation is sustainable across RPT measures, ranging from raw measure and abnormal measure which in turn gauged by residual model and industry-adjusted model. The propping-up hypothesis and the internal capital market hypothesis receive partial support. The findings of this study enhance our understanding of how firms are motivated and how governance quality affects the use of RTPs. Even though RPT by definition might not be equivalent to wealth exploitation, its excessive use is problematic. We contribute to the existing literature by breaking down RPTs into subcategories and gauging level of use with different models. The results portray the importance of corporate governance in reducing the level of RPTs. Some issues could be further explored in the future studies. First, there are other types of related-party transactions through which wealth among shareholders would be transferred. For example, firms might use non-core earnings to manipulate profits (Chen and Yuan, 2004). Moreover, the transfer between tangible and intangible assets could be alternative manifest of related-party transactions. Though the data of exploring these issues would be limited since they are not mandatory items, a further exploration using partial sample would be worthwhile.