Discriminatory related party transactions: a new measure

• DOI: https://doi.org/10.1108/IJAIM-10-2016-0102
• Published date: 02 October 2017
• Pages: 395-412
• Date: 02 October 2017
• Author: Mohammad Tareq,Muhammad Nurul Houqe,Tony van Zijl,Dennis William Taylor,Clive Morley
• Subject Matter: Accounting & Finance,Accounting/accountancy,Accounting methods/systems

Discriminatory related party

transactions: a new measure

Mohammad Tareq

Department of Accounting and Information Systems, University of Dhaka,

Dhaka, Bangladesh

Muhammad Nurul Houqe and Tony van Zijl

Victoria Business School, Victoria University of Wellington,

Wellington, New Zealand, and

Dennis William Taylor and Clive Morley

RMIT University, Melbourne, Australia

Abstract

Purpose –The purpose of this study is to develop a new measure for discriminatory related party

transactions (DRPTs). There are currently measures for such discriminatory transactions but the new

measure hasa strong theoretical basisand is less susceptible to measurement error.

Design/methodology/approach –This paper develops and tests a new measure for these

discriminatory transactions.Type I and Type II error rates and the power of the new measure are compared

with an existingmeasure using computer-simulatedand real data.

Findings –The capital marketsensitivity of the new measure is also tested and comparedwith the existing

measure.The new measure is found to be superior.

Practical implications –The new measure of DRPTs has the potential to contribute to both further

researchon the impact of related party transactions and policy-makingin relation to DRPTs.

Originality/value –This paper hasdeveloped and tested a new measure for DRPTs.

Keywords Related party transactions, Discriminatory related party transactions, Private benef‌its,

Controlling shareholders, Bangladesh

Paper type Research paper

1. Introduction

Controlling shareholders in many companies resort to non-arm’s-length transactions with

related parties for private benef‌it at the costof other shareholders (Atanasov, 2005;Cheung

et al.,2006;Dahya et al., 2008;Dow and McGuire, 2009;Gao and Kling, 2008;Peng et al.,

2011). These transactions not only erodef‌irm value (Atanasov et al.,2010;Jiang et al.,2010,

Peng et al.,2011) but may also lead to bankruptcy.Many of the notorious corporate collapses

in the twenty-f‌irst century are associated with such transactions (Gallery et al.,2008;Ge

et al.,2010). While various terms such as tunnelling, self-dealing transactions and minority

shareholder expropriation have appeared, to date, no unique term has been used in the

literature to describe this discriminatory behaviour of controlling shareholders. The term

The authors thank Ross Watts, David Emanuel and Peter Clarkson for their helpful comments on

earlier versions of the paper. The authors are grateful for the comments made by the participants at

the 2013 Financial Markets and Corporate Governance Conference (especially the discussant), and the

2016 AFAANZ Conference, Gold Coast, Australia.

Discriminatory

related party

transactions

395

Received27 October 2016

Revised11 March 2017

Accepted2 April 2017

InternationalJournal of

Accounting& Information

Management

Vol.25 No. 4, 2017

pp. 395-412

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-10-2016-0102

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/1834-7649.htm

“Discriminatory Related Party Transaction”(hereafter DRPT) is used in this paper to

describe this practice.

Although there have been a number of studies on DRPTs, there has been only limited

systematic effort to develop a measure for such transactions, with the notable exception of

the Anti-Self-Dealing Index by Djankov et al. (2008), which is a comprehensive index to

measure DRPTs. However, the index was developed to measure minority shareholders’

protection from DRPTs in a given country.Currently, many researchers use the total dollar

amount of related party transactions (TRPT) as a measure for DRPTs (Gordonet al.,2004;

Kohlbeck and Mayhew, 2005;Kohlbeck and Mayhew,2010). Some other researchers use the

dollar amount of selected related party transactions (RPTs) or some other derivative of

RPTs as a measure of DRPTs (Cheung et al., 2009a,2006;Gaoand Kling, 2008). However, as

detailed below, the theoreticalunderpinnings for the existing measures have limitationsand,

therefore, the measuresare prone to high measurement error.

Measuring DRPTs is importantboth for theoretical and practical purposes. Studies have

shown that minority shareholder protection is related to capital market development (La

Porta et al., 2008;1998,1997). A developed capital market can aid a country’s economic

development by channelling savings into investment. The economics literature suggests

positive relationships between a more developed stock market and economic growth and

capital accumulation (Levine, 1997;Levine and Zervos, 1998). A country-level measure of

DRPTs may help potential investors in allocation of their investment portfolio across

countries, and a company-levelmeasure may help potential investors in choosingcompanies

for investment and the allocationof investment across those companies. Therefore, a precise

DRPT measure could improve the allocation of equity f‌inance both among countries and

across companies withina country. Moreover, a precise measure would assist researchersto

estimate the relationship between DRPTs and variables inf‌luencing the incidence of such

transactions.

The paper is structured as follows. The next section reviews the literature on DRPTs,

detailing different typesof DRPTs, existing measures of DRPTs and the limitations of those

measures. The new measure is then developedand tested. Data on a set of listed companies

in Bangladesh are usedto illustrate estimation of the new measure and to compare it with an

existing measure. The f‌inal sectionconcludes the paper.

2. Literature review

2.1 Dif‌ferent types of DRPTs for private benef‌it

Different types of transactionsare used by controlling shareholders for DRPT purposes.For

example, selling an asset at a lower thanfair price or acquiring an asset at a higher than fair

price from related partiesof controlling shareholders benef‌its controlling shareholdersat the

cost of minority shareholders.Past studies reveal that such discriminatorypractices occur in

many countries. The study by Cheung et al. (2009b) f‌inds that listed companies in Hong

Kong sell assets to related parties at lower prices than similar arm’s-length transactions.

When these companies buy assetsfrom related parties, they pay more than the market price.

A similar scenario is reported by Ge et al. (2010), where Chinese listed f‌irms sell assets to

related parties on terms that are unfavourable to the f‌irm. Companies buy or sell not only

assets but also goods on terms that are favourable to related parties. Empirical research

shows that companies give favourable terms to related parties in selling and purchase of

goods for the benef‌it of controlling shareholders at the cost of minority shareholders

(Cheung et al., 2009a,2006).

Related party lending is another common way of generating private benef‌its for

controlling shareholdersin many developed and developing countries. The study by Silanes

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