Corporate governance, size and disclosure of related party transactions, and firm value: Indonesia evidence

Abstract

is a research fellow at FEUI. She is also a lecturer in the Bachelor and Master programs at FEUI. Her areas of interest include investment in capital markets, corporate finance and corporate governance. She has authored a number of articles and papers and has presented her research works in international as well as national conference/seminars. Sidharta Utamais a full professor at the University of Indonesia (UI) and is the chairman of the management board of the Indonesian Institute for Corporate Directorship, an NGO aiming to advance good corporate governance practices in Indonesia. He obtained his undergraduate degree in accounting from UI, MBA in finance and information systems from Indiana University, and PhD in accounting from Texas A&M University in 1996. He obtained professional certification as a chartered financial analyst in 1999. At present, he serves as a member of the Tax Oversight Committee, Ministry of Finance, and as a member of the audit committee in a number of listed companies in Indonesia.ABSTRACT This study aims to investigate whether (a) corporate governance (CG) practice has a negative impact on size of Related Party Transactions (RPTs); (b) size of RPTs affects firm value; and (c) better corporate governance practice and higher disclosure on RPTs reduce the negative impact of size of RPTs on firm value. Our sample covers listed companies at the Indonesian Stock Exchange during 2005-2007. We document that better CG significantly reduces the size of RP liabilities and marginally lowers the size of RP assets. Consistent with these findings, we find that size of RPTs has a positive impact on firm value when the transaction involves loans/borrowings from related parties and that it has no impact on firm value when the transaction involves asset placements in related parties. Finally, we find that for companies with less than full disclosure of RPTs, size of RP assets has a negative effect on firm value.

Tax Avoidance, Related Party Transactions, Corporate Governance and the Corporate Cash Dividend Policy

“…Most previous studies focused on investigating the effects of CG's moderation on RPT relationships with market reactions (Cheung et al (2006); Utama et al (2010); Ryngaert and Thomas (2012)) or company values (Kohlbeck and Mayhew (2010); Utama & Utama (2014); Elkelish (2017)). Koestaman and Diyanti (2013) have tested the effect of CG's moderation, but on the relationship between family ownership and cash dividend payouts.…”

Board Independence as a Panacea to Tunneling? An Empirical Study of Related‐Party Transactions in Hong Kong and Singapore

“…One study shows that an exogenous increase in the proportion of independent directors results in an increase in corporate transparency (Armstrong et al 2014). A study in Indonesia also supports the argument that the quality of RPT disclosure typically means better corporate governance (Utama & Utama 2014). Another study confirms the effect in 26 Code of Corporate Governance 2012, Guideline 12.1 (Singapore).…”

“…Yeh et al find a negative correlation between better corporate governance and RPT in a study in Taiwan (Yeh et al ). Utama and Utama examine more than 200 firms listed in Indonesia with financial data between 2005 and 2008 and find that better corporate governance is negatively correlated with RPT liabilities, although they find no significant correlation with RPT assets (Utama & Utama ). Nonetheless, none of these studies identified the causal link between higher board independence and fewer RPTs.…”

Transfer Pricing Aggressiveness and Corporate Governance: Indonesia’s Evidence

“…Regulation of the Capital Market and Financial Institution Supervisory Agency (BAPEPAM-LK) Number VIII.G.7 (2012), which regulates the presentation and disclosure of financial statements of issuers or public Advances in Social Science, Education and Humanities Research,volume 426 companies, specifies what components of financial statements should be disclosed in case of transactions with related parties (RPT). Previous research has summarized this rule and indicates that there are ten components of RPT to be disclosed by the company (Utama & Utama, 2014): (1) the amount of RPT in assets and liabilities;…”

“…Referring to the results of previous studies (Utama & Utama, 2014), this study measured RPTs based on the RPT disclosure group, the RPT associated with the asset group (RPTA) and the RPT associated with the liability group (RPTL). This study did not test the size of RPT based on sales (RPTS) and expenses (RPTE), because based on sample analysis, many companies do not disclose the value of RPTS and RPTE.…”