Corporate Governance and Disclosure of Related Party Transactions

Abstract

Regarding the dual effect of related party transactions (RPTs), it is difficult to prescribe such transactions are beneficial or detrimental to the firm performance. However, disclosure of RPTs can provide stakeholders with necessary information to either discipline firms that engage in RPTs or take precautions against them. In effect, information asymmetry between related parties who involved in RPTs and other stakeholders is the main issue in these transactions. On the other hand, an important role of corporate governance (CG) is monitoring financial information disclosure as a means to relieve this information asymmetry. However, the theoretical literature in RPTs over the last decades has not given considerable attention to the relationship between CG and disclosure of RPTs. Therefore, the objective of this study is to explore the perceptions of experts on the relationship between CG and disclosure of RPTs. A Delphi method is adopted, drawing on semi-structured interviews with four experts to obtain a consensus on the opinion of experts. Analyzing of interviewees’ response suggests that these transactions can be done under the supervision of CG mechanisms to make more benefit for the firm. Furthermore, CG requires managers to make an appropriate disclosure of RPTs to help investors making their own judgments, whether the RPTs are value enhancing or value destroying. Interestingly, this study points that regulators and researchers should consider the diverse nature of relationships between company and its related parties in different countries because of cultural or social characteristics. In addition, the evidence indicates that the interviewees placed a great importance on the factors such as the competency, knowledge, and political agenda of management, ethic of CEO and psychological attributes of the top managers in CG.

Keywords: Corporate Governance, Related Party Transactions

JEL Classification: G34