Do Greater Shareholder Voting Rights Reduce Expropriation? Evidence from Related Party Transactions
71 Pages Posted: 4 Mar 2018
Date Written: February 22, 2018
In the presence of business groups, the expropriation through related party transactions (RPTs) is common and costly to minority shareholders. At the same time, it is well recognized that RPTs can help firms overcome market shortcomings. Using the setting of India's RPT voting rule, I find that a mandatory and binding shareholder voting mechanism helps filter out expropriation. Minority shareholders actively raise their voice against RPT resolutions, resulting in substantial shareholder dissent. My difference-in-difference analysis reveals that shareholder voting has a significant deterrence effect on RPT volume, especially on financial RPTs. I also find that stock prices react positively to news signaling the passage of the voting rule, and that the association between firm profitability and RPT increases following rule's adoption, suggesting that rule has a positive effect on shareholder value. Lastly, I show that mandatory RPT voting makes Indian firms more attractive to foreign institutional investors.
Keywords: business group, shareholder voting, controlling shareholders, tunneling, corporate governance
JEL Classification: G34, K22, M48
Suggested Citation: Suggested Citation