Do Greater Shareholder Voting Rights Reduce Expropriation? Evidence from Related Party Transactions

71 Pages Posted: 4 Mar 2018

See all articles by Nan Li

Nan Li

University of Minnesota - Twin Cities - Carlson School of Management

Date Written: February 22, 2018

Abstract

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

Li, Nan, Do Greater Shareholder Voting Rights Reduce Expropriation? Evidence from Related Party Transactions (February 22, 2018). Columbia Business School Research Paper No. 18-26. Available at SSRN: https://ssrn.com/abstract=3128408 or http://dx.doi.org/10.2139/ssrn.3128408

Nan Li (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

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