The Study On The Influence Of Related Party Transaction With Seasoned Equity Offerings On The Enterprise Value

Adequate funding is a necessary factor for the development of enterprises, how toget a steady stream of funding is an issue every business needs to solve. In capitalmarkets of China, most listed companies have a preference of seasoned equity offerings.In order to obtain the qualification of seasoned equity offerings, listed companies mayadjust their earnings through related party transactions. On one hand, related parties canuse internal resources of the enterprise group more effectively, reduce transaction costs,and improve market competitiveness through related party transactions, on the otherhand, the controlling shareholder could control the listed company by using related partytransactions, which will damage the interests of listed companies and small investors,affect the healthy operation and sustainable development of the capital markets. Then,what is the relationship between related party transactions happened in the company thatraise funds in the way of seasoned equity offerings and the enterprise value, this isdiscussed in this paper.The paper, based on the review of the relevant literature, take the method ofnormative analysis to discuss the relationship between related party transactionshappened in the company that raise funds in the way of seasoned equity offerings and theenterprise value in terms of finance theory, related party transactions theory andenterprise value theory. Finance theory suggests that our capital market has not been astandardized system, the bond market is in an underdevelopment condition, and there arealso many problems in our stock market, regulations are imperfect and the supervision isinsufficient, the stock price is not match to the enterprise value, and the stock market isspeculative, which induce listed companies have a preference of seasoned equityofferings. At the same time, government regulators have also laid down regulations onseasoned equity offerings, listed companies would adjust their current situation to obtainthe qualification of seasoned equity offerings, related party transactions is an effectiveearnings management method. Therefore, we can not rule out that related partytransactions occurred in listed companies which raise funds in the way of seasonedequity offerings are not in the motivation of earnings management. Thus, internal unitswould transfer benefits to listed companies through related party transactions beforeseasoned equity offerings, but after seasoned equity offerings, they would cease thistransport behavior, or even transfer funds raised from capital markets. Related partytransactions theory hold that through related party transactions, related companies can reduce transaction costs as well as organization and coordination costs within theenterprise group, they can share information also; at the same time, synergies can beachieved within the enterprise group, and they can optimize the allocation of internalresources; related parties can bring specific assets to the enterprise group; in the internalcapital market, funds can be made the best use, related party transactions can reducefinancing costs and improve funds usage efficiency, however, conflicts within theinternal capital market would make related party transactions be a negative factor of theenterprise value; the conflict between owners and managers makes managers protecttheir own interests regardless of owners, the conflict between controlling shareholdersand small ones induce controlling shareholders do something harmful to listedcompanies, which would damage the corporate value. Enterprise value theory suggeststhat the assessment of the enterprise value should combine the current situation of listedcompanies with their future growth. In short, related party transactions have a positiveinfluence on corporate value before seasoned equity offerings, while after seasonedequity offerings, related party transactions may be measures controlling shareholderstake to transfer interests, which would reduce the corporate value.Secondly, the paper study the relationship between related party transactions and theenterprise value, in the view of seasoned equity offerings. Based on the proposedhypothesis and the established model, the research is made according to the main linethat seasoned equity offerings-related party transactions-the enterprise value, byselecting Shanghai and Shenzhen A-share listed companies as the research object, andchoosing the2008-2011data from two years before seasoned equity offerings to twoyears after seasoned equity offerings as the study sample. The paper analyze therelationship between seasoned equity offerings and related party transactions firstly, andthen study the influence of related party transactions on the enterprise value in thecondition of listed companies with seasoned equity offerings and without, as well as ofbefore and after seasoned equity offerings. The results show that:(1) The size of relatedparty transactions is larger in listed companies that raise funds in the way of seasonedequity offerings.(2) For the listed companies with seasoned equity offerings, theirconditions are improved because they have got financial support, their related partytransactions have a positive influence on the enterprise value of listed companies withthe synergies achieved in the enterprise group and the optimized allocation of internalresources and so on; For the listed companies without seasoned equity offerings, theirrelated party transactions also have a positive influence on the enterprise value of listed companies, although the size of related party transactions is relatively small.(3)Considering different periods divided by seasoned equity offerings, related partytransactions have a positive impact on the corporate value of listed companies withbenefits transferred from internal units before seasoned equity offerings. When listedcompanies finish financing and obtain funds their need, related parties would stoptransferring interests to listed companies, instead, they may return their conveyedbenefits back, or even transfer funds raised from capital markets. In such situation,related party transactions would reduce the corporate value of listed companies.