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Journal of Accounting Research Vol. 50 No. 3 2012

Not All Related Party Transactions (RPTs) Are the Same: Ex Ante Versus Ex Post RPTs

Michael Ryngaert1; Shawn Thomas2,3

1 University of Florida · 2 Katz Graduate School of Business, University of Pittsburgh. We thank Oya Altinkilic, Leonce Bargeron, Jesse Ellis, J. Harry Evans III, Mark Flannery, Joel Houston, Jason Karceski, Tome Stojcevski, and Jenny Tucker for helpful comments and suggestions. We also thank Jared Smith for research assistanc · 3 Katz Graduate School of Business, University of Pittsburgh. We thank Oya Altinkilic, Leonce Bargeron, Jesse Ellis, J. Harry Evans III, Mark Flannery, Joel Houston, Jason Karceski, Tome Stojcevski, and Jenny Tucker for helpful comments and suggestions. We also thank Jared Smith for research assistanc

open access

Abstract

Related party transactions (RPTs) are potential means for insiders to expropriate outside shareholders via self‐dealing. There are, however, possible benefits to these arrangements for outside shareholders. We find that the overall volume of disclosed RPTs is generally not significantly associated with shareholder wealth as measured by operating profitability or Tobin's Q. However, the results for total RPT volume obscure that ex ante RPTs, transactions that predate a counterparty becoming a related party, are innocuous at worst in terms of their association with operating profitability and significantly positively associated with Tobin's Q whereas ex post RPTs, transactions initiated after a counterparty becomes a related party, are significantly negatively associated with operating profitability. Ex post RPTs also result in significant share price declines when first disclosed and are associated with an increased likelihood that a firm will enter financial distress or deregister its securities. These results are consistent with ex post RPTs serving as means for insiders to expropriate outside shareholders.

DOI
10.1111/j.1475-679x.2012.00437.x
Volume
50
Issue
3
Pages
845-882
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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