Study On Related Party Transactions: Evidence From 2002

The problem of related party transactions accompanies the development of China's stock market. It has natural relationship with the emerging China capital market and the enterprises reform. China's corporate governance structure, economic institutions and weak legal system are conducive to the related party dealings. Chinese listed companies' related party transactions are quite common and the amount is huge. Anecdotal evidence indicates that the current corporate governance system in China fails to constrain controlling shareholders from manipulating earnings and expropriating minority shareholders through related party transactions. A lot of unfair related party transactions distort the resource allocation function of the capital market and mislead the investors.Despite all the media attention, there is very little large sample evidence of related party transactions in academic research because of the difficulty in collecting data and the complexity of the transaction itself. This paper attempts to explore in this field, uses all the Chinese listed companies in the year 2002 as the sample and provides a whole research on related party relationships, related party accounts and transactions. Based on the analysis of listed companies' shareholding structure and economics institution, I lay out three hypotheses: ownership structure impact hypothesis, identity of the largest shareholder impact hypothesis and rights issue offering impact hypothesis, disclose the intrinsic causes behind the related party transactions. This paper also examines the mutual relationships between the transactions and companies' performance.Results in this paper imply that Chinese listed companies have very close relationships with their related parties, the transactions between them are frequent and the amount is huge. Related parties impropriate listed company lots of funds. Firms with high shareholding concentration and group-controlled firms engage in more frequent and high-level related party transactions. Firm with low shareholding concentration and government-controlled firms are comparatively impropriated more funds by related parties. Listed companies with good performance or just offering divert resources to the related parties by some transactions. While when the list companies' performances are bad or they need achieve some criteria, the related parties would provide some help. Listed companies that are impropriated more funds by related parties and involved in more cash out transactions have worse performance. Research results in this paper imply that solving the problem of related party transactions should first begin with the company governance structure, make the listed company totally independent, not just the appendant to other firms or departments. At the same time, information disclosure should be emphasized.