Determinants of RPTs in the Brazilian stock market: analysis of control-ownership wedge, firm value, performance and corporate governance

Flores, Silvia Amélia Mendonça; Sonza, Igor Bernardi

doi:10.1590/1980-53575331sfis

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Estudos Econômicos (São Paulo)

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Artigo de Pesquisa • Estud. Econ. 53 (3) • Jul-Sep 2023 • https://doi.org/10.1590/1980-53575331sfis copy

Determinants of RPTs in the Brazilian stock market: analysis of control-ownership wedge, firm value, performance and corporate governance

Authorship SCIMAGO INSTITUTIONS RANKINGS

Abstract

This study aims to analyze the influence of the control-ownership wedge, firm value, performance, and corporate governance in the value of Related Party Transactions (RPTs) of companies with pyramidal structures. The research is conducted in Brazil over an eight-year period from 2010 to 2017 and uses an unbalanced sample of 153 firms or 929 firm-year observations. The paper uses an OLS panel and a quantile regression as robustness. Our findings show that control-ownership wedge, performance, and corporate governance are determinants of the total value of RPTs. The deviation has a positive influence, showing that the excess of control rights increases the total value of RPTs. On the other hand, performance has a negative effect, showing that less profitable companies have incentives to participate in RPTs. In corporate governance, the relationship is positive, contrary to the expected in the literature. It signals that the corporate governance environment in Brazil has not reduced the total value of RPTs in pyramidal companies. The research contributes to the literature by presenting evidence of an emerging market and relating relevant themes in corporate finance, characterizing the use of RPTs by companies with pyramidal structures.

Keywords:
Related party transactions; Pyramidal; Ownership; Performance; Firm value; Corporate governance

Variable	Abbreviation	Measure	References	ES
Variable dependent
Total value RPTs	RPTs	Log (RPTs) company/year.	Matos and Galdi (2014Matos, Oscar Miguel da Silva Pinto, and Fernando Caio Galdi. 2014. “O Impacto Das Transações Com Partes Relacionadas Na Performance Operacional Das Companhias Listadas Na Bm&Fbovespa.” Contabilidade Vista & Revista 25 (2): 84-97.); Silveira, Prado, and Sasso (2008Silveira, Alexandre Di Miceli da, Viviane Muller Prado, and Rafael Sasso. 2008. “Transações Com Partes Relacionadas: Estratégias Jurídicas e Relação Com a Governança Corporativa e Valor Das Empresas No Brasil.” Estudos Em Governança Corporativa, 1-73.)
Variables independents
Deviation	DEV	Log Deviation=VR¹ - CFR²	Aldrighi (2014Aldrighi, Dante Mendes. 2014. “Concentração Da Propriedade Do Capital e Controle Das Empresas No Brasil.” XIV Encontro Brasileiro de Finanças. XIV Encontro Brasileiro de Finanças.); Aldrighi, Postali, and Diaz (2018)	+
Return on assets	ROA	ROA = $\frac{O p e r a t i n g i n c o m e}{T o t a l a s s e t s}$	Maheshwari and Gupta (2018Maheshwari, Yogesh, and Pankaj Gupta. 2018. “Ownership Structures and Effects of Related Lending and Loan Guarantees on Firm Performance in Business Groups.” Asian Journal of Accounting and Governance 9: 77-86. https://doi.org/10.17576/ajag-2018-09-07. https://doi.org/10.17576/ajag-2018-09-07... ); Wang, Cho, and Lin (2019Wang, Hong Da, Chia Ching Cho, and Chan Jane Lin. 2019. “Related Party Transactions, Business Relatedness, and Firm Performance.” Journal of Business Research 101 (January): 411-25. https://doi.org/10.1016/j.jbusres.2019.01.066. https://doi.org/10.1016/j.jbusres.2019.0... )	+ or -
Tobin’s Q	QT	$Q T = \frac{M a r k e t v a l u e o f e q u i t y + B o o k v a l u e o f d e b t}{T o t a l a s s e t s}$	Bona-Sánchez, Fernández-Senra, and Pérez-Alemán (2017Bona-Sánchez, Carolina, Carmen Lorena Fernández-Senra, and Jerónimo Pérez-Alemán. 2017. “Related-Party Transactions, Dominant Owners and Firm Value.” BRQ Business Research Quarterly 20 (1): 4-17. https://doi.org/10.1016/j.brq.2016.07.002. https://doi.org/10.1016/j.brq.2016.07.00... ); Maheshwari and Gupta (2018Maheshwari, Yogesh, and Pankaj Gupta. 2018. “Ownership Structures and Effects of Related Lending and Loan Guarantees on Firm Performance in Business Groups.” Asian Journal of Accounting and Governance 9: 77-86. https://doi.org/10.17576/ajag-2018-09-07. https://doi.org/10.17576/ajag-2018-09-07... )	+ or -
New Market³	NM	Dummy, where 1 indicates the firms listed on the New Market and 0 otherwise.	Aldrighi, Postali, and Diaz (2018Aldrighi, Dante Mendes, Fernando Antonio Slaibe Postali, and Maria Dolores Montoya Diaz. 2018. “Corporate Governance and Pyramidal Ownership: The Role of Novo Mercado.” Brazilian Review of Finance 16 (1): 5-38.)	-
Big Four	Big4	Dummy, where 1 indicates that the company is audited by one of Big 4; 0 otherwise.	Bhuiyan and Roudaki (2018Bhuiyan, Md Borhan Uddin, and Jamal Roudaki. 2018. “Related Party Transactions and Finance Company Failure: New Zealand Evidence.” Pacific Accounting Review 30 (2): 199-221. https://doi.org/10.1108/PAR-11-2016-0098. https://doi.org/10.1108/PAR-11-2016-0098... ); Rahmat, Mohd Amin, and Mohd Saleh (2018Rahmat, Mohd Mohid, Hanis Amera Mohd Amin, and Norman Mohd Saleh. 2018. “Controlling Shareholders’ Proxy and Multiple Directorships: Insight Evidence from Related Party Transactions.” Asian Journal of Accounting and Governance 9: 27-40. https://doi.org/10.17576/ajag-2018-09-03. https://doi.org/10.17576/ajag-2018-09-03... ).
Audit committee⁴	AuditCom	Dummy, where 1 indicates if the majority of the members of the audit committee are independent; 0 otherwise.	Kang et al., (2014Kang, Minjung, Ho Young Lee, Myung Gun Lee, and Jong Chool Park. 2014. “The Association between Related-Party Transactions and Control-Ownership Wedge: Evidence from Korea.” Pacific Basin Finance Journal 29: 272-96. https://doi.org/10.1016/j.pacfin.2014.04.006. https://doi.org/10.1016/j.pacfin.2014.04... ); Rahmat, Mohd Amin, and Mohd Saleh (2018Rahmat, Mohd Mohid, Hanis Amera Mohd Amin, and Norman Mohd Saleh. 2018. “Controlling Shareholders’ Proxy and Multiple Directorships: Insight Evidence from Related Party Transactions.” Asian Journal of Accounting and Governance 9: 27-40. https://doi.org/10.17576/ajag-2018-09-03. https://doi.org/10.17576/ajag-2018-09-03... ).
Control variables
Size	Size	Logarithm of net sales.	Kang et al. (2014Kang, Minjung, Ho Young Lee, Myung Gun Lee, and Jong Chool Park. 2014. “The Association between Related-Party Transactions and Control-Ownership Wedge: Evidence from Korea.” Pacific Basin Finance Journal 29: 272-96. https://doi.org/10.1016/j.pacfin.2014.04.006. https://doi.org/10.1016/j.pacfin.2014.04... )	+
Leverage	LEV	$L E V = \frac{S h o r t a n d l o n g t e r m d e b t}{T o t a l a s s e t s}$	Aldrighi, Postali, and Diaz (2018Aldrighi, Dante Mendes, Fernando Antonio Slaibe Postali, and Maria Dolores Montoya Diaz. 2018. “Corporate Governance and Pyramidal Ownership: The Role of Novo Mercado.” Brazilian Review of Finance 16 (1): 5-38.); Maheshwari and Gupta (2018Maheshwari, Yogesh, and Pankaj Gupta. 2018. “Ownership Structures and Effects of Related Lending and Loan Guarantees on Firm Performance in Business Groups.” Asian Journal of Accounting and Governance 9: 77-86. https://doi.org/10.17576/ajag-2018-09-07. https://doi.org/10.17576/ajag-2018-09-07... )	+ or -
Tangibility	TANG	$T A N G = \frac{F i x e d a s s e t}{T o t a l a s s e t}$	Aldrighi, Postali, and Diaz (2018Aldrighi, Dante Mendes, Fernando Antonio Slaibe Postali, and Maria Dolores Montoya Diaz. 2018. “Corporate Governance and Pyramidal Ownership: The Role of Novo Mercado.” Brazilian Review of Finance 16 (1): 5-38.); Souza and Bortolon (2014Souza, João Antônio Salvador, and Patrícia Maria Bortolon. 2014. “Transações Com Partes Relacionadas: Determinantes e Impactos No Desempenho Das Empresas.” XIV Encontro Brasileiro de Finanças: XIV Encontro Brasileiro de Finanças.)	+ or -
Foreign capital	FC	Dummy, where 1 indicates ordinary and/or preferred shares owned by foreign capital; 0 otherwise.	Cheung et al. (2009Cheung, Yan Leung, Yuehua Qi, P. Raghavendra Rau, and Aris Stouraitis. 2009. “Buy High, Sell Low: How Listed Firms Price Asset Transfers in Related Party Transactions.” Journal of Banking and Finance 33 (5): 914-24. https://doi.org/10.1016/j.jbankfin.2008.10.002. https://doi.org/10.1016/j.jbankfin.2008.... )	+
Sector Fixed effects	Dummies, where 1 indicates the sector; 0 otherwise		Bona-Sánchez, Fernández-Senra, and Pérez-Alemán (2017Bona-Sánchez, Carolina, Carmen Lorena Fernández-Senra, and Jerónimo Pérez-Alemán. 2017. “Related-Party Transactions, Dominant Owners and Firm Value.” BRQ Business Research Quarterly 20 (1): 4-17. https://doi.org/10.1016/j.brq.2016.07.002. https://doi.org/10.1016/j.brq.2016.07.00... ) Kang et al. (2014Kang, Minjung, Ho Young Lee, Myung Gun Lee, and Jong Chool Park. 2014. “The Association between Related-Party Transactions and Control-Ownership Wedge: Evidence from Korea.” Pacific Basin Finance Journal 29: 272-96. https://doi.org/10.1016/j.pacfin.2014.04.006. https://doi.org/10.1016/j.pacfin.2014.04... )
Temporal Fixed effects	Dummies, where 1 indicates the year; 0 otherwise

Statistics	RPTs	DEV	ROA	QT	Size	LEV	TANG
Mean	20.382	0.315	0.059	0.951	27.420	0.536	0.118
Median	20.298	0.195	0.059	0.778	27.760	0.583	0.004
p10	16.869	0.000	-0.082	0.265	24.103	0.126	0.000
p25	18.880	0.000	0.007	0.557	26.216	0.330	0.000
p75	22.358	0.614	0.121	1.097	29.155	0.739	0.160
p90	23.969	0.904	0.216	1.865	30.007	0.872	0.455
Variance	6.372	0.119	0.013	0.489	4.884	0.071	0.039
Minimum	15.364	-0.001	-0.224	0.076	22.267	0.028	0.000
Maximum	24.596	0.942	0.278	3.059	30.450	0.957	0.651
SD	2.524	0.345	0.115	0.699	2.210	0.267	0.198
Asym.	-0.179	0.669	-0.420	1.641	-0.742	-0.375	1.663
Kurt.	2.358	1.906	3.549	5.533	2.868	2.130	4.430

	RPTs	DEV	ROA	QT	NM	Big4	AuditCom	Size	LEV	TANG	FC
RPTs	1
DEV	0.138	1
ROA	-0.047	0.032	1
QT	0.025	-0.031	-0.013	1
NM	0.182	-0.085	0.037	0.341	1
Big4	0.107	0.067	0.241	0.008	0.011	1
AuditCom	0.202	-0.040	-0.031	0.210	0.223	0.037	1
Size	0.177	0.011	-0.008	-0.043	0.105	-0.017	0.156	1
LEV	0.156	0.030	-0.193	0.132	-0.127	-0.174	0.040	0.161	1
TANG	0.164	0.062	0.060	-0.080	-0.042	0.047	-0.027	0.134	0.046	1
FC	0.110	0.059	-0.000	0.148	0.171	-0.016	0.118	0.098	-0.177	-0.017	1

Variable	Abbreviation	Coefficient	Standard Deviation
Dependent variable: Log total value RPTs
Intercept		1.809**	-
Deviation	DEV	0.020***	(0.004)
Return on assets	ROA	-0.007	(0.005)
Tobin’s Q	QT	-0.018	(0.017)
New Market	NM	0.057	(0.046)
Big Four	Big4	0.076	(0.051)
Audit committee	AuditCom	0.162***	(0.028)
Size	Size	0.013	(0.021)
Leverage	LEV	0.086	(0.096)
Tangibility	TANG	0.076	(0.055)
Foreign capital	FC	0.080*	(0.036)
Sector	Yes
Year	Yes
Number of obs.	400
R²	0.154
Jarque-Bera	6.340
p-value	0.042
T.Wald	3.300
p-value	0.000
T.Woodridge	1.879
p-value	0.175
Mean VIF	1.160

Variable	Abbreviation	Dependent Variable: Log total value RPTs
Variable	Abbreviation	0,10	0,25	0,50	0,75	0,90
Deviation	DEV	0.021*	0.020***	0.020***	0.019***	0.019**
SD		(0.012)	(0.008)	(0.005)	(0.006)	(0.009)
Return on assets	ROA	-0.015***	-0.010***	-0.006***	-0.003	0.000
SD		(0.005)	(0.003)	(0.002)	(0.003)	(0.004)
Tobin’s Q	QT	-0.025	-0.021	-0.017	-0.013	-0.010
SD		(0.037)	(0.023)	(0.016)	(0.019)	(0.027)
New Market	NM	0.188**	0.118**	0.047	-0.005	-0.055
SD		(0.090)	(0.058)	(0.040)	(0.048)	(0.068)
Big Four	BIG4	-0.033	0.024	0.084	0.128**	0.169*
SD		(0.120)	(0.077)	(0.052)	(0.063)	(0.090)
Audit Committee	AuditCom	0.300***	0.226***	0.151***	0.096**	0.043
SD		(0.076)	(0.049)	(0.034)	(0.040)	(0.057)
Size	Size	0.004	0.009	0.013**	0.016**	0.019*
SD		(0.014)	(0.009)	(0.006)	(0.007)	(0.011)
Leverage	LEV	0.198	0.138	0.078	0.033	-0.009
SD		(0.152)	(0.097)	(0.066)	(0.080)	(0.114)
Tangibility	TANG	0.233**	0.149**	0.064	0.001	-0.057
SD		(0.105)	(0.068)	(0.046)	(0.055)	(0.078)
Foreign capital	FC	0.015	0.049	0.085**	0.111***	0.135**
SD		(0.085)	(0.054)	(0.037)	(0.045)	(0.063)
Year		Yes	Yes	Yes	Yes	Yes
Number of obs.			400

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