Economic Consequences of Corporate Governance Disclosure: Evidence from the 2006 SEC Regulation on Related-Party Transactions

60 Pages Posted: 11 Aug 2019

See all articles by Ole-Kristian Hope

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Haihao Lu

University of Waterloo

Date Written: August 7, 2019

Abstract

This paper examines economic consequences of a 2006 Securities and Exchange Commission regulation that mandated public firms to disclose their governance policies on related-party transactions (hereafter RPTs). Employing hand-collected RPT data for S&P 1500 firms, we find that the initiation of RPT governance disclosure significantly reduces the occurrence of RPTs and that the reduction in RPTs is negatively associated with the implied cost of capital (ICC) and positively related to Tobin’s Q. These effects are more pronounced for low-monitored firms and for firms with RPTs that are more likely to be opportunistic. We further find that firms with a formal written policy, a designated committee to review and approve RPTs, or more extensive disclosure on RPT governance benefit in terms of lower ICC.

Keywords: Related-party transactions, disclosure regulation, real consequences, implied cost of capital, corporate governance, RPT governance, SEC, valuation

JEL Classification: G30, G38, M40, M41, M48

Suggested Citation

Hope, Ole-Kristian and Lu, Haihao, Economic Consequences of Corporate Governance Disclosure: Evidence from the 2006 SEC Regulation on Related-Party Transactions (August 7, 2019). Available at SSRN: https://ssrn.com/abstract=3433776 or http://dx.doi.org/10.2139/ssrn.3433776

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

Haihao Lu

University of Waterloo ( email )

Toronto, ON
Canada

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