Study On Benefits Transferring In Companies With Rights Offering: Evidence From Related Transactions

The problem of related party transactions accompanies the development of China's stock market. 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 shareholders from manipulating earnings and expropriating minority shareholders through related party transactions. The objective of this study is to examine whether and how controlling shareholders use related party transactions in earning management and tunneling.Earnings manipulation has been a well-established research topic in the literature. Much of the past research including studies on Chinese listed firms use accounting accruals, non-operating earnings, or simply examine the cross-sectional distribution of earnings and returns on equity, to detect earnings manipulations. Few studies have investigated related party transactions as a means to earnings management. In this paper, we use a sample of 105 Chinese listed companies with rights offering in the year 2001 and provide an in-depth research on related party deals and their changes during the process of rights issues. Based on the analysis of listed companies' shareholding structure and economics institution, two hypotheses are laid out: ownership structure impact hypothesis and identity of the largest shareholder impact.Among the group-controlled listed firms, the results show that they report abnormal declines in the levels of related party sales when the company announces to have an rights offering, and also abnormal increases in the levels of cash outflows from non-recurring related party transaction when cash from rights issues is proceeded.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 much more independent from other firms or departments. At the same time, information disclosure should be emphasized.