Analysis Of Nature, Extent, And Effect Of Related Party Transactions: Malaysian Evidence

Abstract

Related Party Transactions (RPTs hereafter) are transactions between a firm and related entities. While RPTs are normal business transactions, abusive RPTs are a significant corporate problem in Asia, including in Malaysia. Abusive RPTs can potentially occur because many RPTs embedded in documentation that is less clear or thorough than the documentation that ordinarily exists in transactions with unrelated parties. RPTs are often very complex in nature making it easy for them to escape from the auditors and regulators oversight. Therefore, it is important for users of corporate report to provide with appropriate information regarding RPTs to enable them to understand the rationale and risk of corporate undertakings on RPTs. In order to explore corporate practise involving RPTs in Malaysia, this study puts forward the following research questions : i) What are the types of RPTs commonly taken by public listed firms in Malaysia? (RQ1), ii) What is the extent of disclosure of RPTs in circular? (RQ2), and iii) What are the effects of RPTs on firm value? (RQ3). The sample includes 400 circulars from non- financial companies publicly listed in Malaysia in 2012 and 2013. To answer RQ1 and RQ2, a disclosure index that consists of types of related parties, types of RPTs, procedures for RPTs, amount of RPTs, and rationale of RPTs developed. The index enables develop more comprehensive dataset involving RPTs. This approach is taken to enable users of corporate report to understand the nature of disclosure about RPTs information and their details. The results show that there are variations in the types of RPTs as well as the disclosure of information about RPTs. For RQ3, this study employs the firm value model to test whether the RPTs are associate with market value.