Abstract
Related party transactions (RPTs) are potentially either efficient arrangements or tools for self-dealing. Unlike previous empirical studies using data from the United States or developing countries, this article focuses on RPTs in Italy. First, the article compares Italian RPT regulation and disclosure requirements with those of two major Continental European countries (France and Germany). This comparison highlights the burdensome character of the Italian discipline compared with the French and German regulations. Second, it presents data on RPTs disclosed by Italian listed companies. The data indicate that ordinary intra-group commercial and borrowing activities are the most common types of RPTs. Third, the article examines the relationship between RPTs and financial/governance variables used as proxies for costs of, and incentives for, tunnelling. Only a weak association emerges between those variables and RPTs, providing very limited indication of potentially opportunistic behaviour.
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Notes
CONSOB Resolution n. 17221, ‘Regulations containing provisions relating to transactions with related parties’, is available at http://www.consob.it/mainen/documenti/english/laws/reg17221e.htm.
‘In general […] the existence of a company's interest in carrying out related party transactions cannot be excluded a priori. In a few cases, they may be seen as efficient transactions’ (CONSOB, Exposure Draft, para. 10).
‘A committee […] composed entirely of independent unrelated directors or one or more components of the same delegates are involved in the negotiation phase and the initial inquiry by receiving complete and timely information and the possibility to request information and to comment to the managing bodies and entities responsible for the conduct of negotiations or investigation’ (CONSOB Resolution n. 17221, art. 8, para. 1.b).
The IASB issued three revised versions of IAS n. 24 in 1994, 2005 and 2009. The ASB issued a new Exposure Draft in 1989, the Financial Reporting Standard n. 8 in 1995 and an Exposure Draft in 2002. However, the general principle discussed above has never been questioned.
Ex ante transactions are defined as transactions in which the firm and the related party enter into a transaction either before the firm becomes a publicly traded entity or before the counterparty becomes a related party, that is, it acquires a large block of stock or becomes an executive or director.
According to IAS n. 24, para. 9, (a) a person or a close member of that person's family is related to a reporting entity if that person: (i) has control or joint control over the reporting entity, (ii) has a significant influence over the reporting entity, or (iii) is a member of the key management personnel of the reporting entity or parent of the reporting entity; (b) An entity is related to a reporting entity if any of the following conditions applies: (i) the entity and the reporting entity are members of the same group, (ii) one entity is an associate or joint venture of the other entity, (iii) both entities are joint ventures of the same third party, (iv) one entity is a joint venture of a third entity and the other entity is an associate of the third entity, (v) the entity is a post-employment defined benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity, (vi) the entity is controlled or jointly controlled by a person identified in (a), (vii) a person identified in (a) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).
Transactions of greater importance include all the operations in which at least one of the following relevance indices is greater than the 5 per cent threshold: Equivalent-value relevance ratio: the ratio between the equivalent transaction and the net equity drawn from the latest published balance sheet or, for listed companies, if greater, the capitalization at the end of the last trading day included in the period covered by the latest accounting periodical published document; Asset relevance ratio: the ratio between the total assets of the entity in the transaction and the total assets of the company; Liabilities relevance ratio: the ratio between the total liabilities referable to the exchanged good and the total assets of the company.
See German Corporation Law, § 311 Aktiengesetz.
See French Corporation Law, Art. L. 225 – 38/39/40/43. See also the French Corporate Governance Code, available at http://www.ecgi.org/codes/documents/afg_rec_jan2010_en.pdf.
See German Corporation Law, § 311 Aktiengesetz. See also the German Corporate Governance Code, available at http://www.corporate-governance-code.de/eng/download/German-Corporate-Governance-Code-2009.pdf.
Independent directors are defined as non-executive directors who: (i) have no relevant business relationships with the company, its subsidiaries, its managers, its executive directors and its controlling shareholders; (ii) are not owners of such a quantity of shares that can give them the power to control the company and are not part of an agreement with other shareholders, which gives them the power to control the company; and (iii) are not immediate family members of executive directors of the company of other persons who are in the situations referred to in points (i) and (ii).
As a result, the skewness and excess kurtosis indices of all the examined variables are lower than the absolute value of 1. This result allows the assertion to be made that the degree of asymmetry of variable distributions is not a serious concern (De Vaus, 2004).
On average, the percentage of the share capital owned by the main shareholder is 45.5 per cent (median=46.4 per cent).
However, the result of a non-parametric Friedman test shows that the relative median values do not significantly differ over the three sample years (P-value>0.1).
The average (median) value of the %IND variable is 32.1 per cent (30.7 per cent) in 2005, 29.9 per cent (30 per cent) in 2006 and 32.7 per cent (30.9 per cent) in 2007. The non-parametric Friedman test shows a P-value>0.1.
In this case, the non-parametric Cochran test for the binary response variable was carried out in order to compare temporal differences in CEO-duality and the result shows that these variations cannot be considered statistically significant (P-value>0.1).
For the sake of brevity, the results of the robustness analysis are not tabled, but they are available from the author.
An F-test for the nested model was performed to compare the results of Model 1 with those characterizing Model 2. The result makes it possible to reject the null hypothesis that Model 2 does not provide a significantly better fit than Model 1.
For example, larger firms are more likely to have larger Boards and are also less likely to have concentrated ownership. Moreover, a firm with more Board members is more likely to have more RPTs. In fact, assuming the equal likelihood of any Board member making a transaction with the firm, the cumulative number of RPTs is expected to increase as the size of the Board increases.
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Paper presented at the 2009 British Accounting Association Annual Conference (Dundee, 21–23 April), and at the 2010 European Accounting Association Annual Conference (Istanbul, 19–21 May).
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Moscariello, N. Related party transactions in continental European countries: Evidence from Italy. Int J Discl Gov 9, 126–147 (2012). https://doi.org/10.1057/jdg.2011.14
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DOI: https://doi.org/10.1057/jdg.2011.14