An Empirical Study On The Relativity Of Related Party Transactions And Equity Ownership Structure To Tunneling In Listed Firms

As a special type of transactions,related party transaction takes an important part during the operating activities in large-scale conglomerates in the whole world range. Related party transaction appeared when the multinational group company, the parent and subsidiary company and branch organization system developed sufficiently and apply broadly abroad: The Related party transaction can be used to save transaction cost or the reasonable tax avoidance; In many family businesses, related party transaction is also used to change profits or cover a deficit. Despite this, related party transaction should also be authorized by law as ordinary commercial transactions. In fact, there is not any country ban the related party transaction by law completely. Therefore, the related party transaction exists in many conglomerates in the world wide presence. The related party transaction has played a good role in promoting the transaction by savings transaction costs and improving operating efficiencyGenerally speaking, the related party transaction pros and cons. A large number of listed companies in China are unfair transactions which caused damage to the interests of the main multi-related. This is because many listed companies in China are controlled by state-owned enterprise restructured. The government generally installed a relatively high concentration of ownership structure to ensure that the country's absolute control of state assets and to prevent the loss of state assets. Although a series of management reforms have been taken to reduce the concentration of ownership later, listed companies are still trying to transfer the interest on a big scale. Many serious problems are exposed in our country's stock market such as QiongMinYuan, HuoLi28, HouWang, SanJiu, ZhengBaiWen, etc, which are maybe the only tip of the iceberg. It was concluded that the phenomenon that the major shareholders of listed companies transmitted the interests by related party transactions has become so serious that the medium-sized shareholder interests have been seriously violated. How to regulate the big shareholders'act and protect the interests of medium and small shareholders and creditors is becoming a very serious problem for the listed companies, investors, intermediaries and the securities regulatory departments. Then, shall we avoid the phenomenon of interest expropriated through the related party transactions standardized and the equity structure optimized?Based on the thinking of the above problem, this paper focused on the empirical study on the relationship between related Party Transactions,equity ownership structure and Tunneling in Listed Firms.This paper has first carried on a brief review over the evolution of the related party transactions and equity ownership structure, then briefly reviewed the related research on the relationship between related party transactions,equity ownership structure and tunneling in listed firms.Secondly, interpreted the concept of related party transactions equity ownership structure and tunneling. Based on the domestic and foreign relevant literature about the motive of earning management research, according to the situation in China, concluded that lettings, issuance and avoiding been droved out from the capital market were the major motives in our countries'listed companies and the final motive was to transfer the interests of the listed companies to the conglomerates. Through the analysis of the earning management by related party transactions in our countries'list companies, found that the related party transactions'features were form numerous and relationships complex, major concentrated in manufacturing enterprises, the related party transactions under the same parent company and between the parent and subsidiary companies took a great part.Thirdly, analyzed the ownership structure in our countries'list companies and found the features were the complex equity components, the high proportion of shares state-owned and in non-circulation and the equity ownership structure focused; Also I introduced the relationship between the equity ownership structure and tunneling, from the components and the concentration of equity ownership. Reducing the proportion of state-owned and non-circulation shares did help to regulate the tunneling behavior, so as to the transfer of state-owned enterprises'mechanisms. The relative concentration of ownership can be a balance of the property which also is beneficial to supervise and constrain the managers. Either centralized or decentralized form of ownership is not conducive to effective supervision and restraint mechanisms.Fourthly, this paper uses positive methodology to research the relationship between related party transactions,equity ownership structure and tunneling in listed firms. I select the samples of all the listed companies'financial reports which did not get the standard reservations audit report because of related party transactions in the two stock markets of Shanghai and Shenzhen from 2002 to 2005 to do the empirical research. The paper systematically introduced and commented on the relationship between related party transactions,equity ownership structure and tunneling in listed firms from earnings management degree by the related party transactions, the proportion of state-owned shares, the largest shareholder equity nature, the concentration of ownership structure of companies and the size of companies. The results show that: (1) Earnings Management degree by the related party transactions has significant positive correlation with the tunneling which proved that the Earnings Management by the related party transactions is serious and the behavior of tunneling is obviously; (2) Overall, proportion of state-owned shares has significant negative correlation with tunneling. This also shows that state-owned enterprises listed companies are more easily to transmitted the resources to the Group Company through related party transactions. (3) The largest shareholder's equity nature has negative correlation with tunneling, but not statistically significant. Whether the nature of the first major shareholders of listed companies is state-owned shares affects the tunneling not significantly. (4) The concentration of ownership structure has negative correlation with tunneling, but all not statistically significant. The relationship between the ownership structure and tunneling seems complex and reducing the concentration of ownership is not always possible to fundamentally protect the interests of medium-sized and small shareholders. (5) The size of company has significant positive correlation with tunneling, the larger the more seriously.In the light of the above research results, this paper suggest that: we should positively learn and absorb the experience of the related party transactions standardized and the equity structure optimized which western countries accumulate a long time; considering the condition of our country, embark from the practice , strengthen the supervision and management to the tunneling by related party transactions in various ways and construct rational ownership structure, in order to protect the interests of medium-sized and small shareholders from microscopic and macroscopic levels.For these reasons, this paper proposes: establish a scientific evaluation system to measure the performance of listed companies, bring independent director's supervision function into play, improve the internal regulatory bodies just like Board of Supervisors decrease the proportion of state-owned and non-circulation shares, increase penalties against the legal interests of listed companies and so on.