Not All Related Party Transactions (RPTs) are the Same: Ex-Ante vs. Ex-Post RPTs

Journal of Accounting Research, Forthcoming

53 Pages Posted: 7 Dec 2011

See all articles by Michael D. Ryngaert

Michael D. Ryngaert

University of Florida - Department of Finance, Insurance and Real Estate

Shawn Thomas

University of Pittsburgh - Katz Graduate School of Business

Date Written: November 28, 2011

Abstract

Related party transactions (RPTs) are potential means for insiders to expropriate outside shareholders via self-dealing. There are, however, possible benefits to these arrangements for outside shareholders. We find that the overall volume of disclosed RPTs is generally not significantly associated with shareholder wealth as measured by operating profitability or Tobin’s Q. However, the results for total RPT volume obscure that ex-ante RPTs, transactions that pre-date a counterparty becoming a related party, are innocuous at worst in terms of their association with operating profitability and significantly positively associated with Tobin’s Q whereas ex-post RPTs, transactions initiated after a counterparty becomes a related party, are significantly negatively associated with operating profitability. Ex-post RPTs also result in significant share price declines when first disclosed and are associated with an increased likelihood that a firm will enter financial distress or deregister its securities. These results are consistent with ex-post RPTs serving as means for insiders to expropriate outside shareholders.

Suggested Citation

Ryngaert, Michael David and Thomas, Shawn, Not All Related Party Transactions (RPTs) are the Same: Ex-Ante vs. Ex-Post RPTs (November 28, 2011). Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1968687

Michael David Ryngaert

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-9765 (Phone)

Shawn Thomas (Contact Author)

University of Pittsburgh - Katz Graduate School of Business ( email )

246 Mervis Hall
Pittsburgh, PA 15260
United States
412-648-1648 (Phone)
412-648-1693 (Fax)

HOME PAGE: http://www.pitt.edu/~shthomas/index.htm

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