Not All Related Party Transactions (RPTs) Are the Same: Ex Ante Versus Ex Post RPTs |
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| Authors: | MICHAEL RYNGAERT SHAWN THOMAS |
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| Institution: | 1. Department of Finance, Insurance, and Real Estate, Warrington College of Business, University of Florida;2. Katz Graduate School of Business, University of Pittsburgh. We thank Oya Altinkilic, Leonce Bargeron, Jesse Ellis, J. Harry Evans III, Mark Flannery, Joel Houston, Jason Karceski, Tome Stojcevski, and Jenny Tucker for helpful comments and suggestions. We also thank Jared Smith for research assistance. A previous version of this paper circulated under the title “Related Party Transactions: Their Origins and Wealth Effects.” Any errors remain our own. |
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| 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 predate 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. |
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