Related Party Transactions, firm value and
the effectiveness of the Dutch corporate
governance code
Master thesis Accounting, Auditing and Control
Erasmus University Rotterdam
Name:
S.D.A. (Suzanne) van Rooijen
Student number:
304067
Date:
February 2013
Supervisor:
Dr. C.D. Knoops
Co-reader:
Dr. K.E.H. Maas
Key words: Related party transactions, expropriation, firm value, disclosure quality, firm
characteristics, corporate governance code
Abstract
The aim of this research is to investigate whether there is a relation between the amount of
Related Party Transactions (RPTs), firm value and some firm characteristics. Since RPTs
are associated with a risk of expropriation of firms´ resources / fraudulent practising, there
may be a negative relation between the amount of RPTs and firm value. This negative
relation is already proved by the studies of Cheung et al. (2006), Kolbeck and Mayhew
(2010) and Nekhili and Cherif (2011). A high disclosure level might mitigate the negative
effect of RPTs on firm value. This study investigated the relation between the amount of
RPTs, disclosure level in the field of RPTs and firm value. No significant impact on firm value
was found for both the amount of RPTs as disclosure level for the years 2003 as well as
2009. Furthermore, this research investigated which corporate governance and ownership
characteristics had a significant impact on the amount of RPTs. A significant positive impact
was found for the percentage of ordinary shares of the main shareholder on the amount of
RPTs using a ‘normal’ regression, but only for the year 2009. With the panel regression, a
significant positive relation was found between being listed in the USA and the amount of
RPTs. This positive relation was the reverse of the expected effect. The final part of this
research was devoted to the impact of the Dutch corporate governance code on the
protection of minority shareholders. No significant decrease of the amount of RPTs was
found between the year 2003 and 2009. Also no significant increase was found of disclosure
level. Furthermore, the effect (coefficient) of the amount of RPTs and disclosure level on firm
value did not decreased respectively increased significantly over time.
2
Acknowledgment
My research and the final version of this thesis would not have been achieved without the
support of my roommates, friends and family, so I really want to thank them all for their
(mental) support. They all had a perfect timing in showing interest, but above all, in remaining
silent about ´the thesis word’ at the right moments. I also want to thank the fellow thesis
students for the cozy coffee breaks and lunches.
Furthermore, special thanks go to my supervisor, Dr. Knoops, who knew how to stimulate me
in a positive way to achieve my optimal performance. I greatly appreciate his patience, since
the completion of this thesis took more time than planned.
Suzanne van Rooijen
3
List of acronyms
ADR
American Depositary Receipt
AEC
Atomic Energy Community
AICPA
American Institute for Certified Public Accountants
AMvB
Algemene Maatregel van Bestuur (General Administrative Order)
Art.
Article
BV
Besloten Vennootschap (kind of Limited Liability Company)
CGOC
Corporate Governance- and Ownership Characteristic
CV
Control Variable
DASB
Dutch Accounting Standards Board
EC
European Communities
ECSC
European Cole and Steal Community
EEC
European Economic Community
EMH
Efficient Market Hypothesis
EU
European Union
GAAP
General Accepted Accounting Principles
IAS
International Accounting Standards
IASB
International Accounting Standard Board
IASC
International Accounting Standard Committee
IFRS
International Financial Reporting Standards
IPO
Initial Public Offering
LLC
Limited Liability Company
MAAR
Market-Adjusted Abnormal Returns
MTC
Model Tax Convention
NV
Naamloze Vennootschap (kind of Limited Liability Company)
OECD
Organisation for Economic Co-operation and Development
RJ
Raad voor de Jaarverslaggeving (Dutch council for annual reporting)
RPT
Related Party Transaction
SE
Societas Europaea
SEC
Securities and Exchange Commission
SOx
Sarbanes-Oxley Act
SPE
Special Purpose Entity
TQ
Tobin’s Q
VEUO
Vereniging Effecten Uitgevende Ondernemingen (Association of
Securities Issuing Companies)
VvdE
Vereniging voor de Effectenhandel (Association for Securities Trading)
4
Table of contents
Abstract ................................................................................................................................. 2
Acknowledgment ................................................................................................................... 3
List of acronyms .................................................................................................................... 4
Table of contents ................................................................................................................... 5
List of figures ......................................................................................................................... 8
1. Introduction ....................................................................................................................... 9
1.1 Background ................................................................................................................. 9
1.2 Problem definition .......................................................................................................12
1.3 Methodology ...............................................................................................................12
1.4 Sample .......................................................................................................................14
1.5 Contribution ................................................................................................................14
1.6 Structure .....................................................................................................................14
2. Concepts ..........................................................................................................................16
2.1 Introduction.................................................................................................................16
2.2 Institutional setting ......................................................................................................16
2.2.1 European Union ...................................................................................................16
2.2.2 IFRS .....................................................................................................................17
2.2.3 Reporting requirements EU listed companies .......................................................17
2.2.4 Board systems......................................................................................................18
2.2.5 Dutch civil code ....................................................................................................20
2.2.6 Dutch corporate governance code ........................................................................21
2.2.7 Additional regulations for companies with second listing in the USA .....................22
2.3 Related Party Transactions.........................................................................................23
2.3.1 IAS 24 and RJ 300 ...............................................................................................24
2.3.2 Corporate governance code and RPTs.................................................................27
2.3.3 Sarbanes-Oxley Act and RPTs .............................................................................27
2.3.4 Art. 9 OECD MTC .................................................................................................27
2.4 Voluntary disclosure ...................................................................................................28
2.5 Summary ....................................................................................................................30
3. Empirical research ............................................................................................................32
3.1 Introduction.................................................................................................................32
3.2 Agency problem..........................................................................................................32
3.3 RPTs and earnings management ...............................................................................33
3.4 RPTs and firm value ...................................................................................................34
3.5 Investor protection and legal system...........................................................................37
5
3.6 Cross-listing ................................................................................................................39
3.7 Disclosure level ..........................................................................................................40
3.8 Firm characteristics.....................................................................................................41
3.8.1 General ................................................................................................................41
3.8.2 Audit committee financial experts .........................................................................42
3.8.3 Board(s) composition............................................................................................43
3.8.4 Auditor type ..........................................................................................................44
3.8.5 Ownership ............................................................................................................45
3.9 Summarizing tables empirical research ......................................................................46
3.10 Summary ..................................................................................................................53
4. Methodology .....................................................................................................................56
4.1 Introduction.................................................................................................................56
4.2 Problem definition .......................................................................................................56
4.3 Sample .......................................................................................................................57
4.4 Research part I: Relation RPTs, disclosure quality and firm value ..............................57
4.5 Research part II: Relation CGOCs and PRTs .............................................................60
4.6 Panel data analysis research part I & II ......................................................................63
4.7 Research part III: effectiveness Dutch corporate governance code ............................64
4.8 Hypotheses ................................................................................................................65
4.9 Summary ....................................................................................................................66
5. Data collection and data transformation............................................................................67
5.1 Introduction.................................................................................................................67
5.2 Data collection and final sample composition .............................................................67
5.3 Data transformation ....................................................................................................67
5.4 Summary ....................................................................................................................69
6. Empirical results ...............................................................................................................70
6.1 Introduction.................................................................................................................70
6.2 Summary of variables .................................................................................................70
6.3 Descriptive statistics ...................................................................................................71
6.3.1 Disclosure study ...................................................................................................71
6.3.2 Descriptive statistics 2003 ....................................................................................72
6.3.3 Descriptive statistics 2009 ....................................................................................74
6.3.4 Dummy variables ..................................................................................................76
6.4 Research part I: RPTs, disclosure quality and firm value ............................................76
6.4.1 Research part I 2003 ............................................................................................77
6.4.2 Research part I 2009 ............................................................................................77
6.5 Research part II: CGOCs and RPTs ...........................................................................78
6
6.5.1 Research part II 2003 ...........................................................................................79
6.5.2 Research part II 2009 ...........................................................................................80
6.6 Panel analysis research part I & II ..............................................................................81
6.6.1 Hausman tests .....................................................................................................81
6.6.2 Panel data analysis research part I .......................................................................81
6.6.3 Panel data analysis research part II ......................................................................82
6.7 Research part III: effectiveness Dutch corporate governance code ............................84
6.8 Limitations ..................................................................................................................86
6.9 Summary ....................................................................................................................87
7. Conclusion .......................................................................................................................89
8. Further research ...............................................................................................................92
9. References .......................................................................................................................94
9.1 Articles & books ..........................................................................................................94
9.2 Websites.....................................................................................................................97
9.3 Regulation ..................................................................................................................97
10. Appendices ....................................................................................................................99
10.1 Search terms ............................................................................................................99
10.2 Composition of final sample ....................................................................................100
10.3 Results Hausman test.............................................................................................103
10.3.1 Hausman test panel data analysis research part I ............................................103
10.3.2 Hausman test panel data analysis research part II ...........................................103
7
List of figures
Figure 1: Summarizing table empirical research RPTs and earnings management ..............46
Figure 2: Summarizing table empirical research RPTs and firm value ..................................47
Figure 3: Summarizing table empirical research investor protection .....................................48
Figure 4: Summarizing table empirical research second listing.............................................49
Figure 5: Summarizing table compliance/disclosure studies .................................................50
Figure 6: Summarizing table empirical research firm characteristics and RPTs / firm value ..51
Figure 7: Sample composition ..............................................................................................67
Figure 8: Overview of variables ............................................................................................71
Figure 9: Results disclosure study 2003 and 2009 ...............................................................72
Figure 10: Correlation matrix variables year 2003. ...............................................................73
Figure 11: Descriptive statistics research part I year 2003 ....................................................73
Figure 12: Descriptive statistics research part II year 2003 ...................................................74
Figure 13: Correlation matrix variables year 2009. ...............................................................74
Figure 14: Descriptive statistics research part I year 2009 ....................................................75
Figure 15: Descriptive statistics research part II year 2009 ...................................................75
Figure 16: Second listing ......................................................................................................76
Figure 17: Auditor type .........................................................................................................76
Figure 18: Distribution big 4 auditor ......................................................................................76
Figure 19: Multiple regression Part I output 2003 .................................................................77
Figure 20: Multiple regression Part I output 2009 .................................................................78
Figure 21: Multiple regression Part II output 2003 ................................................................79
Figure 22: Multiple regression Part II output 2009 ................................................................80
Figure 23: Multiple regression panel data, random effects model, research part I ................82
Figure 24: Multiple regression panel data, random effects model, research part II ...............83
Figure 25: Paired samples statistics .....................................................................................84
Figure 26: Paired samples correlations ................................................................................84
Figure 27: Paired samples t-test ...........................................................................................84
Figure 28: List of all firms included in the sample ...............................................................100
Figure 29: Hausman test research part I ............................................................................103
Figure 30: Hausman test research part II ...........................................................................103
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1. Introduction
1.1 Background
In the beginning of the 21st century, some frauds dominated the news, like the Enron
scandal. Enron was an American energy and commodities company. The company went
bankrupt in 2001 after a big accounting fraud was revealed. In this case, Related Party
Transactions (RPTs) with Special Purpose Entities1 (SPEs) play a major role. A Related
Party Transaction is a transfer of resources or obligations between related parties,
regardless of whether or not a price is charged (IAS 24.9). Examples of those kinds of
transactions are the sales or purchases of assets, direct or contract services and loans.
These transactions should take place between related parties; this is the case if one party
has the ability to control the other party or exercise significant influence over the other party
in making financial/operating decisions. Enron used RPTs to accommodate certain assets
and liabilities at SPEs. Subsequently, those SPEs were not included in the consolidation,
even though Enron bore the risk of those assets and liabilities. After the bankruptcy, the
legislation concerning RPTs and corporate governance was tightened up for example by the
Sarbanes-Oxley Act (SOx) of 2002.
In my opinion, the Enron case could be considered as a confirmation of the positive
accounting theory; this theory is based on the assumption that individuals are driven by self
interest and act in an opportunistic way. They try to maximise their wealth, whether or not at
the expense of others. Opportunistic behaviour may emerge when a firm enters into RPTs. A
RPT should take place under normal conditions; the price should be at arm’s length. The
arm’s length rule is a general accepted accounting principle, which is given in for example
IAS 18 (revenue). However, a related party who acts opportunistically will try to maximise
his/her wealth and will try to get a more favourable price, since this insider could influence
the agreed conditions. This results in a price which is not at arm’s length anymore; this leads
to expropriation of the firms resources.
One example of a related party is the main shareholder. If the main shareholder enters into a
transaction with the firm based on more favourable terms (for this main shareholder), this
deal could not be characterised as an arm’s length transaction. This leads to the enrichment
of the main shareholder at the expense of the firm and ultimately at the expense of the
minority shareholders, since these transactions affect the assets of the firm. So, this
1
A SPE is a vehicle which is established by a sponsor. The sponsor has no capital interest in the SPE,
but has the ability to exercise significant influence over the SPE in making financial/operational
decisions.
9
opportunistic behaviour of the main shareholder leads to expropriation of minority
shareholders. The risk of expropriation has a negative effect on the marketability of the
securities. So, the risk of expropriation results in a reduction of the value of the securities,
which has a negative effect on a firm’s market value. La Porta et al. (2002) confirmed this
negative relation between the risk of expropriation (weak minority shareholder protection)
and firm value.
Besides the assumption that main shareholders act in an opportunistic way, also firms’
management could behave opportunistically. This opportunistic behaviour of management
can be explained by the agency theory; due to the separation of management (board of
directors, the agents) and ownership (shareholders, the principals) in listed firms, the
managers act opportunistically and could enrich themselves, at the expense of all
shareholders. Management could do so, by directly or indirectly entering into RPTs with the
firm, or by using RPTs to manipulate earnings, for example in order to gain a (higher) bonus.
Above mentioned examples put RPTs in a bad light. However, RPTs may also be used on
legitimate commercial grounds; those transactions could fulfil a firms’ need. So, RPTs are
used for the ordinary course of business. Though, RPTs are often associated with fraudulent
practicing and auditors indicate that they associate these transactions with a high audit risk,
since those transactions are difficult to audit (Gordon and Henry, 2005). Also, the
investigations of Cheung et al. (2006), Kohlbeck and Mayhew (2010) and Nekhili and Cherif
(2011) are based on the negative assumption that RPTs are used to expropriate firms’
resources. Based on this, the assumption that RPTs are used to expropriate firms’
resources is the foundation of this thesis.
To protect all shareholders against opportunistic behaviour of insiders (managers and main
shareholders), regulation is prepared, for example IAS 24 and corporate governance codes
in several countries. IAS 24 consists of regulation on RPTs. It sets requirements for RPT
disclosures in annual reports. Firms are obliged to disclose information about related parties,
management compensation and RPTs. The objective of this standard is to increase the
information provision on RPTs to give users of the financial statement enough information to
find out whether or not the results of the firm may be affected by RPTs.
The Dutch corporate governance code (Code Tabaksblat / Code Frijns) contains articles
about conflicts of interests between the company and executive board members as well as
between the company and supervisory board members. The code of 2003 and 2009 creates
more power to investors; they can enforce compliance with the code. In case of non10
compliance, investors can exert pressure by not granting discharge or by dismissing the
board of directors or supervisory board. In 2004, the Code Tabaksblat came into force. In art.
2:391 paragraph 5 of the Dutch civil code, the Dutch corporate governance code is
determined as a general code of conduct. The general rule of the code is: apply or explain;
the code should be applied, deviations should be explained in the annual report of the firm.
The main critical point on the code Tabaksblat was that it leads to a tick in the box attitude. In
2009, an updated version of the code came into effect (Code Frijns). According to Wielaard
(2009), this code is less extensive than the Code Tabaksblat, it is more principles-based.
This means that the code consists of a conceptual framework, so there is no need of
extensive and detailed regulation.2
IAS 24 and the Dutch corporate governance code aim to prevent opportunistic behaviour of
the main shareholders respectively the management of a firm, because more information on
RPTs should be disclosed. Higher transparency should lead to less opportunistic behaviour.
Another theory is the Efficient Market Hypothesis (EMH), which is based on the idea that the
capital market reacts in an efficient way on provided information. New (unexpected)
information about earnings leads to a share price reaction. Various resources of information
are used to determine share prices. The EMH assumes that managers cannot manipulate
share prices. Opportunistic behaviour of managers will be noticed and penalized by the
market. Advocates of the EMH are opponents of extensive accounting regulation. With IAS
24, the standard setter tries to increase the information provision of RPTs. This regulation
indicates that the standard setter does not (totally) support the EMH, so (extensive)
accounting regulation is necessary. Also the Dutch corporate governance code is an
example of more extensive regulation.
La Porta et al (2000) mentioned the Netherlands as a country which has a low level of
(minority) shareholders protection, like France3. The Dutch corporate governance code
should increase the shareholders protection in the Netherlands by creating more powers to
shareholders. The question is whether the Code Tabaksblat and the Code Frijns have a
positive effect on the protection of (minority) shareholders. A better protection of (minority)
2
The counterpart of principles-based regulation / standards is rules-based standards; these standards
are more extensive and detailed. Preparers of rules-based standards try to cover all kinds of
examples, as well as exceptional cases. This results in very extensive standards. An example of rulesbased standards is US GAAP. IFRS is considered to be more principles-based. However, IFRS also
consist of detailed rules, so Van der Tas (2007) considers IFRS as rules-based.
3 The Dutch civil law system is based upon the French civil law system, derived from the ‘code civil’
which was established under Napoleon.
11
shareholders results in a well-functioning capital market, since good protection of minority
shareholders reduces the risk of expropriation of the firms’ resources. Due to this reduced
risk, potential shareholders are more likely to make their funds available. So, better
protection of shareholders makes it easier for firms to raise capital and results in a more
efficient allocation of capital among firms. Better protection of shareholders is therefore
desirable. When there is no evidence of a positive effect of the Code Frijns on firm value
(and thus shareholder protection), the code may need to be revised to increase the
shareholder protection.
1.2 Problem definition
In this thesis, I will investigate the relation between firm value, RPTs, disclosure level and
corporate governance- and ownership characteristics. The central question in my thesis is:
“Is there a relation between the amount of RPTs and firm value and which firm
characteristics affect the amount of RPTs?”
1.3 Methodology
My research will consist of three parts. In the first part, I will investigate the effect of RPTs as
well as disclosure quality concerning RPTs on firm value. I want to find out whether the
amount of RPTs has a negative effect on a firm’s market value and whether this negative
effect could be mitigated by a high disclosure level. Since RPTs could be used by
management/ the main shareholder to expropriate the firm’s resources, I will use the amount
of RPTs as a proxy for the risk of expropriation. The risk of expropriation is considered to
have a negative effect on firm value, since shareholders bear the risk that resources of the
firm does not benefit all shareholders, but only the main shareholder and / or the firms’
management. A high disclosure level implies a high level of transparency which, in turn,
indicates less risk of expropriation. I will make use of a disclosure study to determine the
disclosure level on RPTs. I expect a high disclosure quality (measured by the amount of
disclosure) mitigates the negative effect of the amount of RPTs on firm value; a high
disclosure quality increases firms’ transparency, which (partially) recovers the trust of
(minority) shareholders. High transparency is expected to indicate less risk of expropriation,
which can be achieved by increasing disclosure quality. Tobin’s Q will be used as a measure
of firm value, since this measure is generally accepted in literature (La Porta et al. 2002,
Nekhili and Cherif 2011, Kohlbeck and Mayhew 2010).
In the second part of my research, I want to find out which corporate governance and
ownership characteristics affect the amount of RPTs. Some characteristics are expected to
have an inhibitory effect on the amount of RPTs. Those characteristics are:
12

Size of supervisory board;

Ratio supervisory board members and total executive + supervisory board members;

Level of expertise of the audit committee;

Cross-listed in the USA;

Audited by one of the big 4 audit firms.
I expect that a large supervisory board, an audit committee with more financial experts and a
high number of supervisory members compared to total number of executive plus
supervisory members lead to better supervision. Better supervision should lead to less risk of
expropriation, since this expropriation could be noticed by the supervisory board / audit
committee. Being also listed (second listing) in the USA indicates a higher level of
shareholder protection, because US-listed firms are subjected to more and extensive
regulation, which better ensure the protection of shareholders. Being audited by one of the
big 4 audit firms indicates higher audit quality. This should lead to less expropriation, since
this is (earlier) noticed. So, above mentioned characteristics are expected to have an
inhibitory effect on the amount of RPTs, since those characteristics should reduce the risk of
expropriation. I want to find out whether or not those characteristics have a significant
negative effect on the amount of RPTs.
Some characteristics are expected to have a stimulatory effect on the amount of RPTs.
Those characteristics are:

Size of the executive board;

Voting rights of the main shareholder;
I expect a large executive board bears a risk of collusion, which has a stimulatory effect on
the amount of RPTs. Due to a separation of duties within the board of directors as a result of
a large board, some directors could collude together, or not all directors are aware of all
affairs. This may result in the expropriation of firms’ resources. Finally, voting power of the
main shareholder (measured by ordinary share percentage) leads to higher risk of
expropriation of the minority shareholder; the main shareholder might try to increase his yield
by entering into RPTs with the firm. As a result, he gathered more than his fair share (based
on his cash flow rights) at the cost of the minority shareholder. In conclusion, the
characteristics as mentioned in this paragraph are expected to have a stimulatory effect on
the amount of RPTs, since those characteristics increase the risk of expropriation. I want to
find out whether or not those characteristics have a significant positive effect on the amount
of RPTs.
In the final part of this research, I want to find out whether the Code Tabaksblat and the
13
Code Frijns have a positive effect on the protection of (minority) shareholders. So, this
research should prove whether or not corporate governance regulation improves the
protection of shareholders against opportunistic behaviour. I will investigate this by splitting
up the data into 2 years. I will compare the amount of RPTs as well as the level of disclosure
in the year 2003 and 2009. I have chosen for these years, because in 2003, no corporate
governance code was introduced yet and in 2009, the code Frijns had just entered into force.
I expect the amount of RPTs has been decreased after the introduction of code Tabaksblat
and Code Frijns (2009), since the amount of RPTs is a proxy for the risk of expropriation, and
I expect the risk has been reduced by the codes. I expect the level of disclosure has been
increased after the introduction of the Dutch codes, because I expect the transparency and
thus the level of disclosure of firms has been increased by the codes, due to the additional
disclosure requirements which are set by the Dutch corporate governance code.
1.4 Sample
The sample of my research will consist of the 118 largest Dutch listed firms in 2003 and
2009, because these listed firms are required to report in accordance with the International
Financial Reporting Standards (IFRS) since 2005 and are obliged to comply with the Dutch
corporate governance code since 2004. The selected years cover the pre corporate
governance code period as well as the period after the latest version of the corporate
governance code came into force (Code Frijns, applicable since January 2009). This ensures
that a comparison could be made between a pre-code year and a post-code year.
1.5 Contribution
This study will contribute to a better understanding of the relationship between the amount of
RPTs and firm value. Furthermore, this research will lead to a better understanding of the
possible mitigating effect of a high disclosure level, as well as a greater understanding of
which corporate governance and ownership characteristics are related with RPTs. Besides
this, it will lead to a deeper understanding of whether or not the Dutch corporate governance
code increased the (minority) shareholder protection in the Netherlands.
1.6 Structure
This thesis is organised as follows. Chapter two contains a theoretical overview; this chapter
discusses the institutional setting in the Netherlands. The European Union (EU) legislation,
Dutch corporate legislation in the civil code and board systems are explained. Besides this,
the history and content of the Dutch corporate governance code are illustrated. Also the
additional requirements for Dutch listed companies with a second listing in the USA are
discussed, since Dutch companies with a second listing in the USA are subjected to
14
extensive regulations. Those USA regulations should better ensure the protection of the
interests of shareholders. After the institutional setting, the legislation around RPTs is
discussed. In this context, the IFRS on RPTs (IAS 24) and the Dutch accounting standard on
RPTs (RJ 330) are outlined; this legislation contains disclosure requirements in the area of
RPTs. Thereafter follows a section on voluntary disclosure; this section contains reasoning to
voluntary disclose more information than mandatory under accounting standards. This
section also contains a study in the field of the measurement of disclosure quality. Chapter
three contains an overview of the main previous studies about related party transactions. In
this context, the relation between RPTs and earnings management is explained as well as
the connexion between RPTs and firm value. Apart from this, prior studies on the relation
between RPTs and corporate governance- and ownership characteristics are discussed, as
well as prior studies in the field of investor protection and cross listing and a
disclosure/compliance study. Chapter four discusses the methodology of the research. This
chapter contains a description of the sample, the hypotheses and the variables. Chapter five
continues with the description of the data collection, final sample composition as well as the
data transformation. Chapter six contains the results of the conducted research as well as
the analysis of those results. This chapter also gives some limitations of my research.
Subsequently, chapter seven gives the conclusion. Finally, chapter eight gives some
suggestions for further research.
15
2. Concepts
2.1 Introduction
In this thesis, the relation between the amount of RPTs, disclosure quality and firm value will
be investigated for the 1184 largest Dutch listed companies, as well as the relation between
some firm and ownership characteristics of those firms and the amount of RPTs. To get a
better understanding of the current structure of Dutch listed firms as well as laws and
regulation in the field of RPTs for listed companies, a conceptual overview will be given in
this chapter. First of all, the institutional setting of the Netherlands will be explained. Thereby,
the EU, IFRS, the Dutch Civil Code, the Dutch corporate governance code and different
types of board systems will be discussed. Also additional regulations for companies with a
second listing in the USA will be explained. Those US regulations are more extensive
compared to Dutch regulations, in order to better ensure / increase shareholder protection.
Besides this, an elaboration will be given on RPTs with the corresponding legislation on this
point, like IAS 24, Raad voor de Jaarverslaggeving 330 (RJ 330), the Sarbanes Oxley act
(SOx) and tax legislation in the Organisation for Economic Co-operation and Development
Model Tax Convention (OECD MTC). After that, a section is devoted to voluntary disclosure.
In this section, the relation between voluntary disclosure and the cost of capital will be
explained. Furthermore, different ways to measure disclosure quality are discussed. I will
conclude with a short summary.
2.2 Institutional setting
2.2.1 European Union
In 1951, the European Coal and Steal Community (ECSC) united six Western European
countries, including the Netherlands, in the economic field. World War II just ended. The goal
of this established community was to avoid new wars, which was also the start of a more and
more intensified cooperation in Europe. An increasing number of countries joined the ECSC.
After the success of this community was proved, more communities were established; the
European Atomic Energy Community (AEC) and the European Economic Community (EEC)
were founded. The objective of the EEC was to create an internal market with free movement
of goods, services, capital and persons. Those three communities later merged to the
European Communities (EC), followed by the European Community (again EC). This EC
represented the first pillar of the European Union (EU), which included economic, social and
environmental policies. The second pillar was the common foreign and security policy, which
4
final sample 98 companies
16
consisted of foreign policy and military matters. The third and last pillar of the EU included
police and judicial cooperation in criminal affairs. In 2009, the treaty of Lisbon was signed;
this treaty simplified the EU. The pillars were abolished and the EU received legal status.
The main institutions of the EU are the European Parliament, the European Commission and
European Council. The European Parliament consists of 754 members which are elected
every 5 years directly by the citizens of the EU member states. The European Council
consists of its president, the heads of state or government of all the EU member states and
the president of the European Commission. The Commission consists of 26 commissioners
and a commission president. The latest is nominated by the European Council and approved
by the Parliament. After this approval, the president chooses the other 26 commissioners.
Above mentioned three institutions are charged with the legislative function of the EU. The
Commission initiates new legislation, which should be approved by the other two institutions.5
One example of such legislation of the Commission was the proposal which stated that all
EU listed companies should report in accordance with IFRS. This proposal will be discussed
in more detail in section 2.2.3 Reporting requirements EU listed companies.
2.2.2 IFRS
In 1973, the International Accounting Standard Committee (IASC) was founded as a result of
an agreement of accounting bodies of some different countries: Canada, USA (AICPA),
Mexico, France, Germany, the Netherlands, UK, Japan and Australia. Over years,
accounting bodies of other countries joined the IASC. The IASC developed International
Accounting Standards (IAS). In 2001, the IASC was succeeded by the International
Accounting Standard Board (IASB). The IASB is an independent standard setting body of the
IFRS foundation. All the members of the former IASC are trustees of the IFRS foundation.
The IASB is responsible for the development of international accounting standards, called
the International Financial Reporting Standards (IFRS). IFRS should meet the highest quality
standards; the standards must contribute to a true and fair view of the annual report. The IAS
are incorporated by the IASB; these standards are extended and supplemented.
2.2.3 Reporting requirements EU listed companies
In 2002, the European Parliament and the European Council agreed to a proposal of the
European Commission stating that all listed companies, subjected to the law of a member
state, should report in accordance with IFRS for accounting periods starting on or after 1
January 2005. The objective of this legislation was to increase the comparability of the
financial statements of EU listed companies in order to accelerate the completion of the
5
www.europa.eu (consulted on June 5th 2012).
17
internal market. Before this regulation came into effect, listed companies reported in
accordance with local GAAP. One system of financial reporting was needed which is
adjusted to international reporting standards. The Commission assigned the current IFRS as
the reporting standards which should be applied. New regulations from the IASB should be
approved by the European Commission. After that, the new regulation should be published
using a commission regulation before it enters into force. Member states are free to require
others than listed companies to report in accordance with IFRS (Regulation (EC) No
1606/2002).
2.2.4 Board systems
In the Netherlands, a corporation6 consists of two bodies; a board of directors and a General
Meeting of Shareholders. A company can voluntary7 choose to add a supervisory board. This
supervisory board is responsible for monitoring the board of directors. This way of
supervising corporate management is called ‘the two tier board system’. The two tier system
is also called a dualistic system and can also be found in some other western European
countries, like Germany, Denmark and Austria.
For large Dutch companies8, it is obliged to have a supervisory board, since those
companies are subjected to special rules, called ‘het structuurregime’. Due to a disturbed
balance between the board of directors and the shareholders as a result of increased spread
of share ownership, the ‘structuurregime’ rules are set up to increase the competences of the
works council as well as the competences of the supervisory board. The increased
competences of those organs were gained at the cost of the General Meeting of
Shareholders. Under the special rules, the supervisory board has the authority to appoint and
dismiss members of the board of directors. The works council as well as the General Meeting
of Shareholders are able to suggest new supervisory board members. However, the
supervisory board has the right to appoint their members by themselves. The works council
and General Meeting of Shareholders may object to this appointment. Besides the
appointment of new board members, the supervisory board has the competence to approve
the annual report (Moerland, 2001). The ‘structuurregime’ is obliged in case of fulfilment of
the following conditions:

The firm has an issued capital plus reserve which exceeds 16 million Euros;
6
BV or NV
Exception: large Dutch companies, which are subjected to ‘het structuurregime’
8 A NV or BV should meet three consecutive years two of the three criteria (subject to some
exceptions): 16.000.000 issued share capital, a mandatory works council and at least 100 employees
working in the Netherlands at the company or associated companies (art.2:153 paragraph 2
conjunction art. 2:263 paragraph 2 Dutch Civil Code).
7
18

The firm has a works council which is mandatory established by law;

The firm has more than 100 employees in the Netherlands (Art. 2:263 paragraph 2
Dutch Civil Code).
Supervision of corporate management is structured in different ways all over the world.
Besides the two tier board system, there is another board system in use called ‘the one tier
board system’. The one tier board system consists of one board of directors, which
comprises executive and non-executive board members. The separation of duties is less
stringent within this board type, but executive officers are mainly responsible for daily
management, whereas non-executive officers are particularly responsible for supervising
(and strategy development). Both types of board members are elected by the General
Meeting of Shareholders. In extreme cases, the shareholders are also qualified to dismiss
the board members. Under normal conditions, this authority has been assigned to the board.
This system is also called a monistic system and is found in most countries over the world,
like the USA and the UK. There are also countries which have regulation which allows both
types of board systems. Examples of those countries are Spain, Portugal and Belgium.
Besides those countries, the EU allows both systems; founders of a ‘Societas Europaea’
(SE), the cross-border European legal entity, are able to choose between the two systems
(Jungmann, 2007). In the Netherlands, the one tier system is permitted since January 1st
2013. I will return on this point later in this section.
Both board systems have strengths and weaknesses. The main advantage of the two tier
model is the separation of management and control. This (should) lead to better shareholder
protection, based on the agency theory. This theory assumes that agents (board members)
try to maximize their wealth at the cost of the principals (shareholders). To protect the
principals, some control mechanisms were deployed, such as the creation of a supervisory
board. Another theory is the stewardship theory, which assumes a steward (board member),
who again tries to maximize their wealth. This model believes in a board member who tries to
satisfy the shareholders in order to maximise his own wealth. Maximum wealth of the
shareholders results in maximum wealth of the board member. Advocates of the last theory
prefer a small supervisory board, since a large supervisory board leads to less efficient
decision making; they believe that supervisory board members have less access to required
information, so they will affect the efficient decision making negatively. The advocates of the
stewardship theory do not recognize the importance of a supervisory board, since they do
not recognize the risk of opportunistic behaviour of board members (De Bos et al. 2008).
The theoretical separation of management and control behind the two tier model appears not
19
to be totally visible in reality. One of the weaknesses of the dualistic system is the fact that
supervisors fulfil both the monitoring and the advising role (strategy development). So,
responsibilities are not clear (Schoenmakers, 2007). However, this is also a weak point of the
one tier model, since separation of duties is not stringent within this board. Besides this, the
supervisory board in a two tier model depends on the information provision by the board of
directors. This dependency on information provision has a negative effect on the
performance and independence of the supervisory board. Moreover, the supervision in a two
tier system is ex post, while the supervision of the non-executive officers in a one tier board
is during the decision-making process. The last two points can be considered as advantages
of the one tier model; there is no information and time gap between executive and nonexecutive officers, since both types of board members are in the same board. Furthermore,
an increasing number of shareholders of Dutch listed firms are non-Dutch. Also more and
more members of the board of directors as well as supervisory board members are nonDutch. Those non-Dutch members are more familiar with the one tier system. So, the one tier
model seems to be more attractive, since this model is generally accepted almost over the
entire world. In this regard, the two tier model has competitive disadvantages; in this respect,
the Netherlands had a less attractive investment climate (Peij, 2010). This disadvantage has
been solved by the introduction of new legislation, which will be elaborated in the next
paragraph.
In 2008, the Dutch government came up with a legislative proposal concerning the flexibility
of the Dutch corporate law. Before this proposal, the two tier board system was the only
permitted board system for large firms in The Netherlands, since large firms are subjected to
the ‘structuurregime’, which requires a mandatory supervisory board. This proposal of 2008
comprises regulation with allows a one tier board. This proposal is submitted in order to
compete with other EU countries on the field of legal forms. Due to decisions of the
European Court of Justice, based on the freedom of establishment, it is now possible to
import foreign European legal forms. To counteract this import, the Dutch government came
up with flexibility of the corporate law legislation. The new legislation came into force by
January first 20139 and legally defines the responsibilities and related liabilities of board
members in case of the monistic system (TK 2008-2009, 31 763 nr. 3).
2.2.5 Dutch civil code
The Dutch civil code, Book 2 contains legislation for Dutch legal entities. Title 9 of book 2
comprises requirements for the financial statements and the annual report. Legal entities
9
Royal Decree of October 4th 2012, Staatsblad van het Koninkrijk der Nederlanden, Jaargang 2012,
455
20
which are subjected to Dutch law (including the limited liability company (LLC), the Dutch
‘Besloten Vennootschap’ (BV) or ‘Naamloze Vennootschap’ (NV)) are also subjected to this
regulation, so Title 9 is also applicable to Dutch listed companies. Besides the LLC, all
banks, irrespective of their legal status, are subjected to book 2 title 9. The scope of this
regulation is that “The annual accounts shall provide, on the basis of generally accepted
accounting principles, such an insight that an informed assessment can be made about the
legal person’s property (assets and liabilities) and result and, insofar as the nature of annual
accounts permits so, about its solvency and liquidity.” (2:362 paragraph 1 Dutch civil code).
Article 2:362 paragraph 8 of the Dutch civil code allows non-listed entities to voluntary report
in accordance with IFRS. Besides this, section 5, title 9, book 2 of the Dutch civil code
contains specific requirements for the disclosures of the financial statement. This section
contains the obligation to give information about the remuneration of directors and deposits,
guarantees and loans granted to directors (article 2:383 Dutch civil code). For NV’s additional
rules are applicable, in case the stocks are freely tradable. In that case, the remuneration
should be specified by director and type of reward, information on issued stock options to
directors should be specified, as well as a the granted loans, deposits and guarantees by
directors (art. 2:383b – 2:383e Dutch civil code).
2.2.6 Dutch corporate governance code
For years, corporate governance is a major point of discussion. In the eighties, the
discussion point was anti-takeover constructions10. The committee Van der Grinten was
established in 1986 to indentify the pros and cons of the existing constructions. In 1987, this
committee concluded that the existing constructions should be maintained. However, the
VvdE (Association for Securities Trading) was an advocate of a limitation of anti-takeover
constructions. The VEUO (Association of Securities Issuing Companies) was established
and joined forces with VvdE. Those associations constitute the ‘Committee for Corporate
Governance’ (Committee Peters) in April 1996. After half a year, the committee issued an
interim report, called ‘Corporate governance in Nederland: een aanzet tot verandering en
een uitnodiging tot discussie’. In 1997, the final version of this report was released:
‘Corporate governance in Nederland: de veertig aanbevelingen’. This report consists of forty
recommendations in the field of corporate governance in general (not only anti-takeover
constructions). Generally speaking, the committee was in favour of increasing shareholders’
individual impact. Firms are invited to consider improvements based on the forty
recommendations and report this in their annual report. To monitor the compliance with the
forty recommendations, a new committee was constituted; the Committee Peters II. This
10
Constructions which frustrate shareholders’ control.
21
committee concludes that only 14 of the total 159 Dutch listed companies had modified their
corporate governance (DeJong et al. 2001).
In 2003, the report of 1997 was replaced by a new code, called ‘De Nederlandse Corporate
Governance Code’. The Dutch corporate governance code has been established to recover
the confidence in corporate governance. After a number of frauds, like Enron, the checks and
balances within a company were needed to be reconsidered. This code was developed by a
new committee under the guidance of Morris Tabaksblat (chairman) and is therefore also
known as ‘Code Tabaksblat’. The two pillars of this code are: integrity and transparency of
the board as well as proper supervision on the board. The code consists of both rules and
principles. Listed companies are obliged to apply the code. The legal basis of this obligation
can be found in art. 2:391 paragraph 5 of the Dutch Civil Code, which stated that additional
requirements regarding the annual report can be set by AMvB (General Administrative
Order). The Code Tabaksblat was identified as code of conduct by General Administrative
Order in December 2004, so the code needed to be applied for accounting periods starting
on or after January 2004. Deviations are allowed, provided that these should be illustrated in
the annual report. This is known as the ‘comply or explain’ rule. Shareholders could enforce
compliance with the code by making use of their powers, like through not granting discharge
or dismissing the board and / or supervisory board. The Dutch corporate governance code is
applicable to one tier boards as well as two tier boards. There was also constituted a new
committee which should monitor the compliance with the code, under the guidance of Jean
Frijns.
In 2009, the Code Tabaksblat was replaced by a modified code. This code was adjusted by
the earlier mentioned monitoring committee under the guidance of Jean Frijns, and therefore,
also known as ‘Code Frijns’. The main critical point on the code of 2003 was the fact that it
leads to a tick in the box attitude. The newest code is less extensive than the Code
Tabaksblat, it is more principles-based. This should avoid the tick in the box attitude. Besides
this, the supervisory board members get more responsibilities, for example in the field of
remuneration policy. Furthermore, the need of an internal auditor should be evaluated every
year in case there is not an internal auditor appointed yet. In addition, the code contains
specific regulation for one tier boards (Wielaard, 2009). The code Frijns came into force for
accounting periods starting on or after January 1st 2009.
2.2.7 Additional regulations for companies with second listing in the USA
The USA have their own financial reporting standards, US GAAP, which are developed by
the Financial Accounting Standards Boards (FASB). Those standards are more rules-based
22
compared to IFRS and therefore more extensive. US GAAP have no legal basis, but
compliance with the standards is enforced by the Securities and Exchange Commission
(SEC). The SEC performs a supervisory role; it enforces different kinds of legislation, like the
Securities Act of 1933, the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of
2002.
In 2002, after some big scandals in the USA, the senators Paul Sarbanes and Michael Oxley
came up with a legislation proposal to avoid new scandals and to recover investors’
confidence. This act is well known as the Sarbanes Oxley Act or SOx. This act contains
legislation for public companies boards and public companies’ accountants firms. Important
sections of SOx are section 203 and 401; the first section requires audit firms to rotate the
lead audit partner of an issuer every 5 year and section 401 prohibits the provision of loans
to executive officers.
Dutch listed companies have the ability to trade their shares on a US stock exchange. The
shares of those foreign companies are represented by American Depositary Receipts
(ADRs). Those ADRs allow US investors to buy for example securities of Dutch listed
companies, without bearing currency risk. There are different types of ADRs; level I ADRs
(which allows foreign firms to trade their shares over the counter 11), level II ADRs (which
allows foreign firms to list on a US stock exchange) and level III ADRs (which allows foreign
firms to issue shares in the US). The higher the ADR level, the more SEC requirements the
firm must meet.
Level I ADRs need not to be registered at the SEC or report in according to US GAAP. Level
II & III ADRs must file a SEC registration form and must comply with SEC regulation,
including SOx. In addition, the SEC requires those foreign US listed companies to file an
annual report in Form 20-F (foreign company form) (Fitzgerald et al., 2009). So, Dutch listed
firms with a second listing in the USA are required to file their annual report this way. In
principle, firm’s which are listed in the USA should file an annual report in accordance with
US GAAP. However, foreign firms may also file an annual report based on IFRS, but those
firms should add a reconciliation statement, which highlights the material differences with US
GAAP and its impact on equity en profit (Bakker & Vergoossen, 2004).
2.3 Related Party Transactions
In this section, the specific legislation in the field of RPTs is discussed. IAS 24 is explained,
11
Those shares may not be traded on a US stock exchange.
23
as well as RJ 330, the standard regarding RPTs of the Dutch Accounting Standard Board
(DASB, in Dutch ‘ Raad voor de Jaarverslaggeving’ (RJ)). Besides this, the principles
concerning RPTs of the Dutch corporate governance code are discussed. Finally, some
international tax regulations regarding RPTs are explained.
“A Related Party Transaction is a transfer of resources or obligations between related
parties, regardless of whether a price is charged” (IAS 24.9). Examples of those kinds of
transactions are the sales or purchases of assets, direct or contract services and the
provisions of loans. The essential point of these transactions is the fact that they should take
place between related parties. Related parties are for example the main shareholder, a
member of the board of directors or an affiliated company. The difference between a ‘normal’
transaction and a RPT is the connection between the two parties which are involved;
because the parties are related, the determined price or other conditions may not be at arm’s
length.
Different motives could be given for a non-arm’s length price. One important motive could be
a tax motive; firms manage earnings to obtain a lower tax rate or carry back/ carry forward
losses. This reason for non-arm’s length pricing is because it is beneficial to the firm.
However, tax authorities try to prevent this; non-arm’s length pricing erodes the tax base of
countries, because profits leak to tax havens. Besides tax motives, there could be other
motives for non-arm’s length pricing. Another motive could be the enrichment of the
controlling shareholder/ board member(s). This leads to the enrichment of controlling
shareholder / board member at the cost of the firms and ultimately all shareholders.
RPTs seem to be always negative for a firm. However, related party transactions could also
be based on legitimate grounds, on pure commercial reasons. It could fulfil a firms’ demand,
for example by the purchasing of knowledge or specific skills.
A transaction between third parties should always be assumed as an arms’ length
transaction, since those parties have no reason to benefit the other party to the detriment of
themselves. IAS 24 is completely devoted to related party disclosure. Also Dutch GAAP
contains regulations about disclosure of RPTs; this is given in RJ 330.
2.3.1 IAS 24 and RJ 300
In March 1983, the IASC issued Exposure Draft E25. This Exposure Draft resulted in IAS 24,
which came into force at January 1st 1986. The IASB adopted this standard in 2001. The
standard was revised two times. In 2003, the IASB issued an updated version, which came
24
effective on January 1st 2005. This update was a modification of the disclosure requirements
of management compensation, disclosure requirements in separate financial statements, and
disclosure requirements for government related entities. The latest updated version (2009)
came into effect on January 1st 2011 which simplifies the definition of RPT’s and provided
some partial exceptions for some government-related entities.
The aim of IAS 24 is to ensure that financial statements contain information about related
party transactions. It may be that those transactions negatively affect the financial position of
a company. The standard contains definitions of a related party transactions as well as de
definition of a related party. The last one is quite extensive.
A related party of the reporting entities is defined as a person or entity that:

has control or joint control (> 50%) over the reporting entity;

has significant influence (20% < 50%) over the reporting entity or its related entity;

is a member of the key management personnel of the reporting entity or the parent
entity, or of a related party;

is part of the same group as the reporting entity;

is an associated entity of the reporting entity;

is a joint venture of the reporting entity (or vice versa) or the reporting entity as well
as the other entity are a joint ventures of the same third party;

is a post-employment benefit plan for employees of the reporting entity or related
parties;

is controlled or jointly controlled by a related person of the reporting entity (IAS 24.9).
However, two parties which have a shared joint venture or two parties which have the same
key management member or a key member who has significant influence over the other
entity are not characterized as related parties (IAS 24.11).
Based on IAS 24.13, entities are required to disclose information about the relation with
related parties (regardless whether RPTs have taken place with those related parties). The
name of the parent and (if different) the controlling party should be disclosed. In case
transactions have taken place between the entity and the related party, additional information
should be included in the disclosure. “At a minimum, disclosures shall include:

the amount of the transactions;

the amount of outstanding balances, including commitments and:
o
their terms and conditions, including whether they are secured, and the nature
of the consideration to be provided in settlement; and
25
o
details of any guarantees given or received;

provisions for doubtful debts related to the amount of outstanding balances; and

the expense recognised during the period in respect of bad or doubtful debts due
from related parties.” (IAS 24.18).
According to IAS 24.19, the information about RPT’s should be separated by different groups
of related parties, like the parent, entities of joint control/significant influence, subsidiaries,
associates, joint ventures, key management and other. In addition, the reporting entity should
report the key management compensation in total and by category (IAS 24.13-24.19). The
information provided should enable the users of the financial report to analyse the effects of
the RPT’s on the firm’s performance.
In the Netherlands, the Dutch Accounting Standard Board (DASB), develops accounting
guidelines, which are applicable for small, medium and large unlisted companies. Before the
EU requirements for listed firms came into effect in 2005, those guidelines were also
applicable for Dutch listed companies. The RJ guidelines have officially no legal status, but
the guidelines are generally accepted accounting principles (GAAP). RJ 330 is the Dutch
guideline on the reporting on RPTs. IAS 24 and RJ 300 are broadly similar.
However, in 2003, RJ 330 was formulated more generally. Under RJ 330 as well as under
IAS 24, entities were required to disclose information about the relation with related parties
(regardless whether RPTs have taken place with those related parties). Under RJ 330, also a
description of the type and nature of transactions had to be given. Furthermore, RJ 330-115
stated that: “those elements of the transactions which are necessary for the understanding
which must be given by the annual account”. Some examples of elements are given, like the
amount or percentage of the transactions, amounts of outstanding balances and the applied
pricing policy. However, those elements are just elements which may be relevant. The
requirements of IAS 24 are more stringent and clearer on this point. Besides this, RJ does
not require individual financial statements to contain information on RPTs, in contrast to IAS
24.3. Based on RJ 330, entities are also not required to give information about the
remuneration of directors (Van der Linden, 2009). However, this is a requirement under the
Dutch civil code as mentioned in section 2.2.5 Dutch civil code, nevertheless, this information
should be included in the annual report. The bottom line is that IAS 24 and RJ 330 are
broadly similar, but IAS is more extensive. Moreover, IAS 24 is obliged for Dutch listed
companies as of January 2005, whereas RJ 330 had officially no legal status.
26
2.3.2 Corporate governance code and RPTs
The Code Frijns contains principles and best practice provisions for board of director’s
members as well as supervisory board members. The code includes for both boards a
section regarding conflicts of interest. Direct transactions with a member of one of the boards
are characterized as a conflict of interest. Besides this, there exists a conflict of interest when
the firm enters into a transaction with another company where:

the board member held a substantial financial interest;

a relative of a board member held a board position; or

a board member held a board or supervisors position.
Directors, supervisors, main shareholders and the external auditor may not enrich
themselves to the detriment of the company. Those transactions must be approved by the
supervisory board. In case a decision must be taken concerning a transaction with a
supervisory board member, this supervisor is not allowed to participate in the decisionmaking process. The transaction should be made under common conditions in the sector.
2.3.3 Sarbanes-Oxley Act and RPTs
The Sarbanes-Oxley act of 2002, as elaborated in section 2.2.7 Additional regulations for
companies with second listing in the USA, also contains a section in the field of RPTs;
section 401 prohibits the provision of loans to executive members. This legislation applies to
Dutch listed corporations which are also listed (second listing) in the USA (Gordon & Henry,
2005, p. 1).
2.3.4 Art. 9 OECD MTC
The OECD (Organisation for Economic Co-operation and Development) is a cooperation of
34 countries all over the world, including the Netherlands. This organisation was established
in 1960 to promote economic and social wellbeing of individuals around the world.12 The
OECD has also drawn a Model Tax Convention (MTC). This convention is used as a basis
for all of the bilateral tax treaties which are concluded by the Netherlands. The MTC contains
an article about ‘Associated Enterprises’. This article contains legislation on the
determination of profits of enterprises which are involved in RPTs. As mentioned before, a
motive for entering into (cross-border) RPTs could be obtaining a lower tax rate. To achieve
this goal, profits are moved to countries with favourable tax rates (tax havens). Without this
regulation, a countries’ tax base could be eroded, because profits are shifted to tax havens,
which affect a countries’ tax revenue. Besides this, double taxation or partial non-taxation
could occur, because the tax authorities of the respective countries apply different transfer
12
www.oecd.org (consulted on June 22, 2012)
27
prices. To avoid this, the transactions should be priced appropriately; this discipline is called
‘transfer pricing’. The importance of transfer pricing has increased the last decades due to
increased globalisation. Article 9 of the OECD MTC requires enterprises to determine the
transfer prices as if the transaction was made on an arm’s length basis. The OECD MTC
contains the following definition of arm’s length pricing: if “conditions are made or imposed
between the two enterprises in their commercial or financial relations which differ from those
which would be made between independent enterprises, then any profits which would, but for
those conditions, have accrued to one of the enterprises, but, by reason of those conditions,
have not so accrued, may be included in the profits of that enterprise and taxed accordingly.”
(Article 9 paragraph 1 OESO MTC).
To set an arm’s length price for a transaction (or a set of transactions), a benchmark study
must be carried out. Comparable transactions under comparable market conditions, business
strategies and contractual terms have to be found, which have occurred between third
parties. Those transactions are supposed to be at arm’s length. In some cases, comparable
transactions could not be found, for example because similar transactions do not take place
between third parties. In that case, the prices of almost similar transactions should be
adjusted for the extent to which they differ materially. The benchmark study results in a price
range; the price of the RPT should be within this range to be considered as an arm’s length
price.
2.4 Voluntary disclosure
In the previous section, accounting standards in the field of RPTs were discussed.
Accounting standards are mainly aimed to oblige firms to provide backward looking financial
information. However, value creation increasingly depends on intangible assets. Those
intangible assets are not always recognised in the financial statement. The market requires
more information beyond the backward looking financial information (Beattie et al., 2004 p.
206). This information is of great importance for making rational decisions with respect to
capital allocation by investors. Narrative disclosures are more and more used to provide the
required information to the market. Firms may opt to disclose more information, in addition to
the mandatory disclosures, as required by accounting standards. Those voluntary
disclosures are driven by the idea that a higher level of transparency reduces the cost of
capital.
Botosan (2006) described the negative relation between disclosure level and cost of capital.
She mentioned two different reasoning’s which are used to substantiate this negative
relation. The first one is the reasoning that additional information reduces investors’
28
estimation risk. Investors make an estimation of the expected payoff of a firm. This
estimation is more uncertain in case a firm have provided limited information compared to a
firm which provided more extensive information. The degree of uncertainty of the estimated
expected payoff determines the estimation risk level. In case a firm provides more (voluntary)
information, the estimation risk decreases, since investors are more able to make a reliable
estimation of the firms expected payoff. The demand for those securities will increase
compared to firms which provide less information. Due to the increased demand, the cost of
capital will decrease. So, due the decrease of the estimation risk, the cost of capital of the
firm will decrease. The second reasoning is the argument that additional information reduces
transaction costs (information asymmetry). In case firms disclose more information
voluntarily, investors are less willing to gain additional, costly, private information; the
reduction of the information asymmetry results in a decrease of the transaction costs. The
demand for securities of firms which provided additional information will increase. Due to the
increased demand of those securities, the cost of capital will decrease.
The Jenkins Report, published by the American Institute for Certified Public Accountants
(AICPA, 1994) also mentioned the negative relation between (voluntary) disclosure and the
cost of capital. It is an influential report which contains recommendations on the field of
business reporting. This report includes a new model on business reporting, which covers a
larger range of business reporting rather than the financial statement. The report contains 5
main elements:

financial and non-financial data;

management's analysis of financial and non-financial data;

forward-looking information;

information about management and shareholders; and

background about the company.
This report focused more on the information needs of the users of the annual report;
investors as well as creditors (AICPA, 1994).
Assuming that there is a negative relation between the level of disclosure and the cost of
capital, the next question is how the level of disclosure/disclosure quality should be
measured. Quality is not an easy concept to measure. The amount of disclosure is often
used as a proxy of the quality of disclosure. Beattie et al. (2004) investigated the different
methods used by other researchers to measure disclosure quality. They mentioned two basic
methods for measuring disclosure quality which were used up to then; first of all the
subjective analyst disclosure quality rankings and secondly disclosure indices where again
the amount of disclosure serves as a proxy for disclosure quality. Since those two methods
29
have limitations and weaknesses, like the subjectivity of the analyst disclosure quality
rankings and the fact that the methods are one-dimensional, Beattie et al. (2004) developed
a new approach of measuring disclosure quality; a four dimensional content analysis
framework that captures topic, time-, financial- and quantitative orientation. The topic
analysis is based on the Jenkins report. The method of Beattie et al. (2004) split up the text
of annual reports into text units. All text units were divided into the different topics. Besides
this, the text units were divided into different time dimensions (historical, forward looking or
non-time specific), financial orientation (financial or non-financial) and quantitative orientation
(quantitative or non-quantitative). The subdivision within the four dimensions was carried out
by a computer program. However, this new approach also has limitations, the used coding
scheme is subjective and, moreover, labour intensive.
Furthermore, Beattie et al. (2004) proposed new proxies for disclosure quality. As mentioned
before, the amount of disclosure is often used as a proxy of the quality of disclosure. Beattie
et al. introduced more dimensions of disclosure quality, like the relative amount of disclosure
(taking into account company’s size and complexity) and the distribution of disclosures
across different topics.
2.5 Summary
This chapter gave a conceptual overview. First of all, the Dutch institutional setting was
described. A part of this institutional setting is the EU, in the meantime a co-operation of 26
member states. The European Commission came up with a legislation proposal stating that
all EU listed companies should report in accordance with IFRS for accounting periods
starting on or after January 1st 2005. IFRS are reporting standards, developed by the IASB,
the successor of the IASC. The European Parliament agreed on the proposal. Besides
European legislation, Dutch listed companies are subjected to Dutch national law. This
legislation can be found in the Dutch civil code. This code contains requirements for the
annual report and financial statement in particular. Besides this, there is a corporate
governance code. The two pillars of this code are integrity and transparency of the board as
well as proper supervision on the board. Dutch listed companies are obliged to apply the
code; deviations should be explained in the annual report.
Large Dutch companies are structured according to the two tier system. They consist of a
board of directors, a General Meeting of Shareholders as well as a mandatory supervisory
board. However, most countries apply the one tier system, consisting of a board of directors
with executive and non-executive officers and a General Meeting of Shareholders. This
structure is accepted in the Netherlands since January 1st 2013, after new regulations
30
took effect.
After that, RPTs were described. “A Related Party Transaction is a transfer of resources or
obligations between related parties, regardless of whether a price is charged” (IAS 24.9). The
difference between an ordinary transaction and a RPT is the connection between the two
parties which are involved; because the parties are related, the determined price or
conditions might not be at arm’s length. However, entering into RPTs could also be based on
pure commercial reasons. IAS 24 and RJ 330 contain disclosure requirements in the field of
RPTs. The aim of these standards is to ensure that financial statements contain information
about related party transactions, because it may be that those transactions affect the
financial position of a company. Also the corporate governance code, SOx and the OECD
MTC contain regulation on RPTs, the latter in the field of taxation.
The subsequent section was devoted to voluntary disclosure. Due to value creation depends
more on intangible assets (which is not recognized at the balance sheet), additional
information is required for investors to make rational capital allocation decisions. It is
assumed that there is a negative relation between the amount of disclosure and the cost of
capital. Botosan (2006) described some possible reasoning behind this negative relation.
She mentioned two different arguments: a decrease of investors’ estimation risk and a
reduction of transaction costs. To meet the information need of the market, firms do provide
additional disclosure voluntarily. The Jenkins report, as published by the AICPA in 1994,
contains recommendations in the field of business reporting; business reporting should
contain more than the financial statement. The quality of disclosure is not easily to
determine; the amount of disclosure usually serves as a proxy for disclosure quality. Beattie
et al. (2004) investigated different ways used by other researchers to determine disclosure
quality. They developed a new method: a four dimensional content analysis framework.
Furthermore, they proposed new proxies for disclosure quality: relative amount of disclosure
(depending on firm size) and the distribution among topics.
31
3. Empirical research
3.1 Introduction
In this chapter, an overview will be given of the relevant previous conducted empirical studies
in the field of RPTs, investor protection, firm value, disclosure and some other corporate
governance- and ownership characteristics. First of all, the agency problem will be explained.
This theory constitutes the basis of the expropriation of firms’ resources, by making use of
RPTs. Firms might try to mask such expropriation by managing their earnings. So, the third
section will discuss some studies in the field of RPTs and earnings management.
Subsequently, some studies in the field of RPTs and firm value will be discussed. In those
studies, RPTs are used as a proxy for the risk of expropriation, so RPTs should have a
negative impact on firm value. This negative impact might be lower in countries with higher
investor protection. A higher investor protection could be achieved by more stringent
legislation, which ensures that firms are obliged to provide more information. This might
result in a lower cost of capital, due to a decreased risk; investors are more willing to provide
capital. Section five will explain empirical research in the field of investor protection
legislation and financial market development. This will be followed by a section which is
devoted to some studies concerning cross-listing; firms may try to decrease their cost of
capital by cross-listing in a country with a high investor protection level, for instance the USA.
The subsequent section will discuss a disclosure / compliance study. Furthermore, empirical
research in the field of the relation between some corporate governance- and firm
characteristics and firm value will be discussed. Some characteristics might have a
stimulatory effect on RPTs or firm value, others might have an inhibitory effect. Finally, a
short summary will be given.
3.2 Agency problem
As explained in section 2.2.4 Board systems in the previous chapter, ownership and control
are separated in Dutch listed companies. The board of directors (or executive officers) is
responsible for daily management, while the shareholders hold a financial interest in the
company. This separation could lead to conflicts of interest, which is better known as the
agency problem. The agency theory is the underlying theory behind the expropriation of
firms’ resources by firms’ management.
The agency problem is defined as a problem which arises due to different interests of the
principal on the one hand and the agent on the other hand. The principal hires the agent to
represent his interests. However, individuals are driven by self-interest, so principals as well
32
as agents will strive for their own goals. Since those goals are not always the same, the
principal should motivate the agent to act in the principals’ interest. To achieve this, costs are
made, called agency costs.
Jensen and Meckling (1976) explained that the principal agent problem may occur within
firms. A firm is sometimes considered to be ”a “black box” operated so as to meet the
relevant marginal conditions with respect to inputs and outputs, thereby maximizing profits,
or more accurately, present value” (Jensen & Meckling, 1976, p. 306-307) or as “one form of
legal fiction which serves as a nexus for contracting relationships…” (Jensen & Meckling,
1976, p. 311). In public firms, ownership and control are separated; the shareholders are the
owners of the firm, but firms’ board of directors executes daily management. So, the
shareholders delegate some of their competences (decision making) to the board. The
separation of ownership and control causes the agency problem. Also in this case, the two
parties are driven by self-interest; firm owners (principals) strive for maximization of profits /
firm value, while the board (agents) strive for maximization of their own compensation.
Furthermore, the board has more information compared to the shareholders (information
asymmetry), so it is difficult for the shareholders to monitor whether the board acts in the
interest of the shareholders or own interest. To converge the objectives of the board to the
objectives of the shareholders, some incentives could be given to the board. One option is
depending the compensation of board members on firms’ profit / firm value. Another option is
to monitor the decision making of the board by the supervisory board or the non-executive
board members.
The agency problem also holds for controlling or main shareholders against minority
shareholders. Again there is a mismatch between the interests of the controlling or main
shareholder and the minority shareholders, for example when the firm enters into RPTs with
the controlling / main shareholder.
3.3 RPTs and earnings management
As mentioned in the previous section, the board may act in their own interest; the board tries
to maximize their own wealth at the expense of shareholders, an example of the earlier
mentioned agency theory. RPTs could be used by the management of the firm to enrich
themselves at the cost of the firm. To mask such expropriation, the management will
probably try to manage earnings. Alternatively, related party transactions could also be
based on legitimate grounds (commercial purposes). Those transactions do not need to be
masked, so there is no reason to manage earnings. This section will discuss some studies in
the field of RPTs and earnings management.
33
Gordon and Henry (2005) examined whether there is a correlation between RPTs and
earnings management, the latter measured by adjusted absolute abnormal accruals. They
investigated the relation between earnings management and:

different types of RPTs;

RPTs classified by type of related party;

total number of RPTs per firm.
Their sample consisted of 331 US listed companies for the years 2000 and 2001. They
demonstrated that one type of RPTs is significant positively related with earnings
management. This type of RPT is fixed-rate financing from related parties. They also
discovered that there are some types of RPTs significant negatively related with earnings
management, namely direct or indirect transactions with executive board members and the
provision of management services. This refutes the theory that management tries to mask
expropriation by managing earnings. They also proved that earnings management is not
associated with the following types of RPTs: investment banking, real estate and purchases,
direct services and loans. In addition, they found no relation between the number of RPTs
per firm and earnings management. So overall, only some types of RPTs are related with
earnings management. This conclusion could not be argued for RPTs in general.
The research of Chen et al. (2011) investigated RPTs during Initial Public Offering (IPO)
periods, also in the context of earnings management. The sample consisted of 257 Chinese
firms in the period 1999-2000. They found that firms in an IPO period entered into more
operational RPTs and manage accruals to increase operational results. After the IPO, the
amount of operational RPTs decreased, with negative consequences for the operational
results of those firms. This indicates the use of RPTs for opportunistic purposes of the firms’
management.
Generally speaking, above mentioned researches are not unambiguous. Chen et al. (2011)
concluded that there is a positive relation between RPTs and earnings management; RPTs
are used to manage earnings during IPO periods. However, Gordon and Henry (2005)
demonstrated that there was only a positive relation between one type of RPTs, namely fixed
rate financing and earnings management. They found a negative relation between
transactions with executive board members or the provision of management services and
earnings management.
3.4 RPTs and firm value
RPTs are associated with expropriation of a firm’s resources; the management or main
shareholder of a firm can arrogate firms’ assets by entering into RPTs. By applying a price
34
which is not at arm’s length, the firm is disadvantaged, which is, at the end, a disadvantage
for the (minority) shareholder. This risk may occur in case firms enter into RPTs. So,
investors may associate RPTs with fraud/ expropriation, which have a negative effect on firm
value. The risk of expropriation has a negative effect on the marketability of the securities.
So, entering into RPTs should result in a reduction of the value of the securities, which has a
negative effect on a firm’s market value. In this section, some studies in the field of RPTs and
firm value will be discussed.
Kohlbeck and Mayhew (2010) investigated whether firms which disclosed RPTs have a
significant lower stock market valuation compared to those which did not disclose RPTs.
Their sample consisted of S&P 1500 firms in 2001 (the pre SOx year). After elimination of
some missing data, the final sample consisted of 1,194 firms. The data was hand collected.
Kohlbeck and Mayhew used Tobin’s Q as a measure for a firm’s market valuation. They
proved that firms which enter into RPTs have a significant lower market value and
subsequent return, compared to non-RPT firms; the market value of RPT firms is 8 percent
lower. The lower subsequent return indicated that investors in RPT firms are not
compensated for the lower market value in subsequent years. Research in the field of
transaction types (nature and type of related party) proved that the negative effect on market
value is mainly driven by loans and simple transactions with directors, officers and
shareholders.
Nekhili and Cherif (2011) also investigated the effect of RPTs on firm value. Their sample
consisted of 85 companies listed on the Paris Stock Exchange during the period 2002-2005.
Their research consisted of two parts; they investigated the effect of different variables
(including the number of RPTs) on firm value as well as the effect of different variables on
the number of RPTs (see for the results of the second part section 3.8.1 General). The total
number of RPTs was divided in two different types; RPTs with directors, managers and main
shareholder and RPTs with subsidiaries and affiliated companies. Hereafter, the RPTs with
directors, managers and main shareholder were split up in two subcategories; direct
transactions with main shareholders, directors and managers and indirect transactions with
main shareholders, directors and managers (via subsidiaries and affiliated companies). As
Kohlbeck and Mayhew (2010), they found a negative relation between RPTs and firm value;
they found that total number of RPTs negatively affects firm value (the latter again measured
by Tobin’s Q). They discovered this effect was mainly caused by direct transactions with
main shareholders, directors and managers, not by indirect transactions via subsidiaries and
/ or affiliated companies. This is in line with the finding of Kohlbeck and Mayhew (2010), who
also found that the negative effect on market value is mainly driven by transactions with
35
directors, officers and shareholders. Furthermore, Nekhili and Cherif (2011) investigated the
impact of other variables on firm value. They found that being listed in the USA has a positive
impact on firm value, being audited by a big 4 audit firm has a negative effect on firm value.
Cheung et al. (2006) examined RPTs between listed companies in Hong Kong and their
shareholders and / or directors between 1998 and 2000. They tried to find out which type of
firms are more likely to participate in those RPTs, which type of those transactions leads to
expropriation of minority shareholders and whether the market reacts on the expropriation by
obtaining shares at lower prices. If (potential) shareholders take the risk of expropriation into
account in advance, they expected no valuation effects during or after RPTs have taken
place. Their sample consisted of ownership-, corporate governance- and financial data of
603 Hong Kong listed companies. Besides this, the sample with regard to RPTs consisted of
375 filings. Just as the research of Nekhili and Cherif (2011) and Kohlbeck and Mayhew
(2010), they proved that expropriation of minority shareholder exists, for their case in the
Hong Kong stock market. This expropriation is reflected in shareholder value, the latter
measured by market-adjusted abnormal returns (MAAR). They found evidence that firms
which entered into RPTs earned significant negative MAAR during the announcement of the
transactions as well as the year after the announcement compared to firms which entered
into arm’s length transactions. The types of transactions which are the most harmful are
sales or acquisition of assets, equity relationships, cash payments and trading relationships.
Furthermore, they discovered that the higher the ownership percentage of a firm is, the
greater the negative effect on earned MAAR. Moreover, a low disclosure level and not being
audited by a big 5 audit firm has a negative impact on earned MAAR. However, the presence
of an audit committee has a positive impact on earned MAAR.
Ge et al. (2010) conducted a research in the field the value relevance of disclosures about
RPTs. They investigated the value relevance of those disclosures on the valuation of firms
for two sample periods; 1997 to 2000 and 2001 till 2003. They focused on two specific kinds
of RPTs, namely the sales of goods and the sales of assets. Their sample consisted of the
top 100 listed Chinese firms according to New Youth Fortune13. After the elimination of all
non-manufacturing firms, the final sample consisted of 52 manufacturing firms. They found
that investors devaluate earnings when firms entered into RPTs for the period 1997-2000;
the earnings multiplier of firm’s which entered into RPTs was significantly lower compared to
those firms, that did not enter into RPTs. In this period, the legislation on fair value RPT
measurement was not into force yet. To prevent investors for the abuse of RPTs in order to
13
Chinese financial magazine
36
manipulate earnings, the Chinese government introduced in 2001 the RPT fair value
measurement regulation. After this adoption, no significant difference was found between the
earnings multiplier of firm’s which entered into RPTs compared to those, which did not enter
into RPTs. So, no evidence was found for the devaluation of earnings after the adoption of
the new fair value measurement regulation. This indicates that the legislation restored the
confidence of investors. The value relevance of the disclosed information increased.
However, only a few types of RPTs are included in this study, so this conclusion could not be
extended to all kind of RPTs.
3.5 Investor protection and legal system
As discussed in the previous section, different studies indicated that RPTs have a significant
negative impact on firm value, because RPTs are associated with expropriation of firms’
recourses. Since shareholders bare this risk of expropriation when firms enter into RPTs,
they are less willing to provide money to the capital market. This should make it more
complicated for firms to raise capital. To solve this problem, legislation and regulation may be
introduced to increase investor protection, to improve the rights of investors and the
information provision to the investors. The study of Botosan (2006), as discussed in section
2.4 Voluntary disclosure, already explained the relation between disclosure level and the cost
of capital; a higher disclosure level should result in a lower cost of capital. Furthermore, Ge
et al. (2010) already demonstrated that investors do not devaluate earnings any more after
the adoption of new RPT fair value measurement regulation. So, increasing the disclosure
level may reduce the risk of expropriation. This section will discuss some studies in the field
of investor protection by legal system.
La Porta et al. (1998) tried to explain the large differences between countries in the field of
ownership and financing of firms by exploring the differences among countries in legal
protection of investors. They investigated the legislation concerning the protection of
shareholders and creditors of 49 countries, including the Netherlands. They researched the
differences in laws as well as the differences in enforcement of those laws. They split up the
law systems of countries around the world in 4 groups; common law countries, French civil
law countries (including the Netherlands), German civil law countries and Scandinavian civil
law countries. They examined the effects of the differences in law on firm ownership. They
proved that investors have the best protection under the common law system and the
weakest protection under the French civil law system. The German and Scandinavian
systems are in between. Furthermore, they proved a negative correlation between the level
of legal investor protection and the concentration of ownership.
37
La Porta et al. (1997) researched the possibilities for firms in above mentioned different law
systems to raise debt as well as equity. They expected firms in countries with strong investor
protection and a high quality of law enforcement could raise debt and equity under more
favourable conditions, so they expected that those firms raise more external financing. Their
sample once again consisted of 49 countries. They measured the development level of
financial markets by the number of IPOs, the number of domestic listed firms and the total of
private and bond borrowings. They proved that high legal protection of investors resulted in
more developed capital markets.
La Porta et al. (2002) investigated the relation between legal protection of minority
shareholders and cash flow rights of controlling shareholders on firm value. Better investor
protection should lead to more investors/creditors that are willing to provide money, which
benefits an efficient allocation of capital. More cash flow rights of the controlling shareholder
should result in less expropriation of this controlling shareholder, because this shareholder
has fewer incentives for expropriation; this shareholder already receives remuneration for his
shareholding, so he is less inclined to expropriate firms’ resources. Their sample included
539 firms of 27 wealthy economies, including The Netherlands. They used Tobin’s Q as a
measurement for market value. Legal protection of minority shareholders was measured by
the origin of a countries law system in combination with the index of specific rules which
protect minority shareholders. To investigate the association between cash flow rights of
controlling shareholders on firm value, they focused on firms with controlling shareholders.
This study of La Porta et al. (2002) confirmed the negative relation between weak minority
shareholder protection (the risk of expropriation) and firm value. So, strong investor
protection has a positive significant effect on firm valuation. Besides this, they proved a
positive relation between cash flow rights of controlling shareholders and firm valuation, in
particular in countries with a low level of investor protection.
Djankov et al. (2008) investigated the anti-self-dealing legislation of different countries. They
indexed the degree of minority investor protection against self-dealings with controlling
shareholders, based on answers of questionnaires. The questionnaire was filled in by
lawyers of 102 firms. The lawyers should describe how the specific legislation of the
respective country elaborates for a specific case. The final sample consisted of 72
respondents. A higher index number represented better protection of minority shareholders.
They found that the index number is significantly higher in common law countries compared
to French civil law countries, which corresponds with the study of La Porta et al. (1998).
After that, Djankov et al. (2008) investigated the relation between the index number and the
38
development of financial markets of those countries. Stock market development was
measured by five different indicators; average stock market capitalisation to GDP, medium
premium paid for control in corporate control transactions, ratio number of publicly traded
firms to country population, average value of IPO’s to GDP and a proxy for ownership
concentration. They proved that countries with a higher index number have better developed
financial markets; this conclusion is in line with the study of La Porta et al. (1997). Common
law countries have the strongest developed financial markets; French civil law countries have
the least strong developed markets.
3.6 Cross-listing
In the previous section, La Porta et al. (1998) as well as Djankov et al. (2008) both found that
the common law countries have better investor protection compared to the French civil law
countries. La Porta et al. (1997) as well as Djankov et al. (2008) proved that better investor
protection results in a more developed financial market. So, firms in countries with low
investor protection are disadvantaged. Some firms may increase the protection level of their
(potential) investors by cross-listing in a country with a high(er) level of investor protection.
One example of a country which can be classified as a country with a high level of investor
protection is the USA. The USA is well known for their high investor protection; the legislation
is more stringent, think of the extensive regulation under US GAAP and SOx. In this section,
some studies in the field of cross-listing, firm growth opportunities, market development and
RPTs are discussed.
Reese and Weisbach (2002) researched the assumption that firms listed in countries with
weak investor protection tried to compensate this by cross-listing in the USA. They split up
the law systems in 4 groups, as introduced by La Porta et al. (1998); common law, French
civil law, German civil law and Scandinavian civil law. Their sample consisted of 2,038 crosslisted firms between January 1985 and June 1999 on NYSE, NASDAQ, OTC, or PORTAL.
They proved that the number and the value of equity issuing increased after a cross-listing.
Besides this, firms listed in countries with low investor protection are more likely to issue after
a cross-listing. Furthermore, these latter companies issued larger volumes. Ultimately, they
found that firms with a home listing in a country with low investor protection are likely to issue
shares in non-USA countries, while firms with a home listing in a country with strong investor
protection are more likely to issue in the USA. This may indicate that firms in low investor
protecting countries chose for a cross-listing in the USA to increase the level of investor
protection, in order to raise capital more easy.
Doidge et al. (2004) tried to find out whether there is a relation between firm value and cross39
listing in the USA. Cross-listing in the USA was expected to be beneficial for a firm; firms are
expected to raise funds more easily at lower costs. Their sample consisted of 8,680 firms in
1997. Firm value was again measured by Tobins Q. They found evidence that firms that
were cross-listed in the USA have a 16.5% higher Tobins Q ratio compared to firms which
were not cross-listed in the USA (but located in the same country). Furthermore, they want to
find out why some firms cross-list and others do not. They investigated whether there is a
relation between the growth potential of a firm and being cross-listed in the USA. They
expected that firms which are cross-listed in the USA have higher growth potential compared
to firms which are not cross-listed, in case firms with growth opportunities depend on raising
capital at the market. Being cross-listed limits the ability of main shareholders to expropriate
the firms’ resources, since it is assumed that minority shareholders are better protected
under US regulation. In case the benefits from growth opportunities exceed the benefits from
the expropriation by the main shareholders, the main shareholder will choose to cross-list in
the USA. They found evidence that cross-listed firms in the USA have significant higher
valued growth opportunities in comparison with non-cross-listed firms.
Cheung et al. (2006) found that firms with Chinese owners (cross-listed in Hong Kong) are
more likely to enter into RPTs and furthermore, those firms have poorer information
disclosure. Hong Kong regulation which must protect investors is not enforceable in China.
So, the fact that firms with Chinese owners are more likely to enter into RPTs indicates that
legal system (poor minority shareholder protection in China) has a positive impact on
undertaking RPTs. They found limited evidence that the market takes the risk of
expropriation into account in advance. However, this does not apply for firms with Chinese
owners, which are cross-listed in Hong Kong; those firms experienced a negative effect on
earned MAAR in the year prior to the RPT. This probably indicates that poor minority
shareholder protection had a negative effect on firm value in advance.
3.7 Disclosure level
One way to increase the level of investor protection is by introducing more stringent rules
and regulation, like in the USA. The research of Ge et al. (2010) already showed that the
introduction of a new disclosure standard on RPTs increased the value relevance of the
disclosure, which resulted in the absence of earnings devaluation by investors. A higher level
of investor protection results in a more developed capital market, where firms can more
easily raise capital, as proved by Djankov et al. (2008) and La Porta et al. (1997). Also firms
could influence the cost of capital by increasing their information level. This increased
disclosure level could be imposed by accounting regulation, but firm could also disclose more
information voluntary. To determine the level of disclosure of firms, a disclosure study could
40
be conducted. This section will discuss such a disclosure/compliance study in the field of
related parties and RPTs.
Backhuijs and Braam (2008) investigated the information provision of Dutch listed companies
(in April 2008) with regard to related parties and directors remuneration in their annual report
of 2007. Their sample consisted of 73 companies. They found evidence that all companies
mentioned subsidiaries as well as board members as related party in their consolidated
financial statement. Furthermore, most firms mentioned the parent (96%) and associated
companies (81%). Joint ventures are mentioned in more than half of the statements (59%),
firms with control or significant influence over the reporting entity in 71% of the consolidated
financial statements. Less than 10% mentioned related parties in their pre-consolidated
financial statement, only 7% mentioned firms with control or significant influence and only 8%
mentioned subsidiaries or associated companies. 23% refer to the consolidated financial
statement. Furthermore, they investigated the information provision on RPTs in the annual
reports. The companies mainly mentioned the nature of the transactions (63%), the amount
of the transaction (62%) and the amount of outstanding balances (56%). Again, the
information is mainly mentioned in the consolidated financial statement. Finally, they
investigated the information provision regarding remuneration of directors. Since this part of
disclosure of RPTs is excluded in my research, I will not go into this.
3.8 Firm characteristics
Cheung et al (2006) proved, as mentioned in section 3.6 Cross-listing, that there is a
negative relation between the level of investor protection and RPTs. There are also some
firm characteristics which may be related to RPTs and firm value. The study of Cheung et al.
(2006), as discussed in section 3.4 RPTs and firm value, already proved the negative impact
of the ownership percentage, a low disclosure level and not being audited by a big 5 audit
firm on earned MAAR. They also proved the positive impact of the presence of an audit
committee on earned MAAR. Furthermore, Nekhili and Cherif (20110) investigated the
impact of some characteristics on firm value. They found that being listed in the USA has a
positive impact on firm value. They found a negative effect of being audited by a big 4 audit
firm on firm value. This section will discuss some more studies in the field of firm
characteristics, RPTs and firm value.
3.8.1 General
Nekhili and Cherif (2011) investigated, besides the effect of RPTs on firm value (as
mentioned earlier in section 3.4 RPTs and firm value), the effect of some corporate
governance characteristics on the number of RPTs. Again, their sample consisted of 85
41
companies listed on the Paris Stock Exchange during the period 2002-2005. They found that
being cross-listed in the USA has a positive effect on the number of RPTs, especially on
RPTs with subsidiaries and affiliated companies. The number of (direct) RPTs with main
shareholders, directors and managers is positively affected by the percentage of voting rights
held by the main shareholder, the ratio of independent non-executive directors compared to
total number of directors as well as the size of the board of directors. The independence ratio
of the audit committee and the ratio between financial liabilities and total debt also increase
the number of direct RPTs with main shareholders, directors and managers. Being audited
by one of the big 4 audit firms decreases the number of RPTs, particularly direct RPTs with
main shareholders, directors and managers. No significant relation was found between being
part of a group and the separation between ownership and voting rights of the main
shareholders and RPTs.
3.8.2 Audit committee financial experts
The Dutch corporate governance code contains an article which requires Dutch listed
companies with a supervisory board which exceeds 4 members to set up an audit committee.
This audit committee should include at least one financial expert (rule III.5.7 corporate
governance code 2009). This expert is defined as a person who has relevant knowledge and
experience in financial administration / accounting for listed companies or other large
companies (rule III.3.2 corporate governance code 2009).
Also the SEC issued legislation which requires listed firms in the USA to disclose whether the
audit committee includes a financial expert and whether this expert is an independent board
member. Initially, the SEC defines a financial expert as a person with expertise in the field of
accounting. After some comments, the SEC expands the definition by including nonaccounting financial experts (with more general financial expertise, for example as
CFO/CEO). In case the firm has no financial expert in his audit committee, the firm should
explain why this is not the case (SEC, 2003).
Financial experts of the audit committee are deemed to have more financial expertise, and
therefore, should be better able to monitor the RPTs. So, the risk of expropriation should
decrease in case the audit committee consist of one or more financial experts.
DeFond et al. (2005) examined the market reaction (measured by the three day cumulative
abnormal returns around the announcement) on the appointment of financial experts in the
audit committees of firms. They made a distinction between accounting financial experts and
non-accounting financial experts. They also tested whether there is a difference in market
42
reaction between the appointment of financial experts on the audit committee in case the
committee includes a financial expert already (replacing of a member or increasing the
number of financial experts) compared to the case there is no financial expert in the
committee already. Furthermore, they examined the effect of the strength of corporate
governance; they expected a positive market reaction on financial experts mainly applies to
firms with strong corporate governance. The strength of corporate governance was
measured by different variables: board size (this variable was expected to have a negative
impact on the strength of corporate governance) and the proportion of outside directors, audit
committee size, audit committee independence, institutional ownership and a governance
index (those variables were expected to have a positive effect on the strength of corporate
governance). Their sample consisted of 702 announcements of the appointment of new audit
committee members in the period 1993-2002 from the Corporate Library Database. They
found a positive market reaction on the appointment of accounting financial experts in audit
committees. No significant reaction was found to the announcements of the appointment of
non-accounting financial experts as well as non-financial audit committee members.
Furthermore, they found evidence that the positive market reaction only applies to firms with
strong corporate governance. No evidence was found that the market reaction depends on
whether or not the audit committee includes a financial expert before the announcement of a
new member.
Krishnan and Lee (2009) researched the relation between corporate governance (measured
by the same variables as DeFond et al. 2005), potential litigation risk and the number of
accounting financial experts in the audit committee. They expected that accounting financial
expertise is positively related with financial reporting quality, since the accounting financial
experts could monitor more effectively. So, firms will try to reduce their potential litigation risk
by appointing accounting financial experts in their audit committee. Their sample consisted of
802 Fortune 1000 firms of 2004. They found that the higher the potential litigation risk, the
more likely firms have accounting financial experts in their audit committee. However, this
only applies to firms with strong corporate governance; no relation was found between
potential litigation risk and the number of accounting financial experts.
3.8.3 Board(s) composition
The composition of a firms’ board differs per country (one tier board as well as two tier
board). Also the number of board members is not determined; firms are allowed to choose
the number of executive or non-executive board members (in case of a one-tier board) or the
number of supervisory- and executive board members. However, you could argue that a
larger supervisory board or more non-executive board members is / are better able to
43
monitor the executive board members. So, a larger number of non-executive / supervisory
board members may decrease the risk of expropriation by management/main shareholder.
So, this should have a positive effect on firm value and thus a negative relation with RPTs,
since this is a proxy for the risk of expropriation.
Dayha et al. (2008) investigated the relation between the proportion of non-related board
members and firm value. The sample consisted of data from the year 2002 and included 799
firms from 22 countries in total (including The Netherlands), after the elimination of 40 firms
with missing data. Firm value was again measured by Tobin’s Q. They proved that there is a
significant positive relation between firm value and the percentage of non-affiliated members
of the board of directors. This relation is stronger in countries with a lower investor protection.
Besides this, they examined the relation between the proportion of non-affiliated board
members and the existence of RPTs with controlling shareholders; they proved a significant
negative relation. Furthermore, they proved that directors are part of boards of multiple firms,
which, according to them, confirm the theory that board members improve their supervision
in case the main shareholder could dismiss the board member; in case of redundancy, there
is no loss of opportunities for board positions at other firms.
3.8.4 Auditor type
DeAngelo (1981) explained the correlation between auditor size and audit quality. Due to
high transaction and start-up costs, firms are unwilling to change of auditor. This should
indicate that the audit firm could behave opportunistically by increasing audit fees or by
lowering audit quality. On the contrary, in case the client leaves the audit firm, the audit firm
loses ‘client-specific quasi-rents’ (DeAngelo 1981, p. 184). Those client-specific quasi-rents
are expected to prevent auditor for acting opportunistically. The bigger the audit firm, the
higher the client-specific quasi-rents which are at stake. So, to retain clients, bigger audit
firms should supply a higher level of audit quality.
So, a big 4 audit firm may supply better audit quality; this should reduce the risk of
expropriation. So, (minority) shareholders are served by hiring a big 4 audit firm to perform
the firm’s audit. This should again have a positive effect on firm value and a negative relation
with RPTs, since this is a proxy for the risk of expropriation. However, the research of Nekhili
and Cherif (2011) and the study of Cheung (2006) as discussed in section 3.4 RPTs and firm
value proved that being audited by one of the big 4/ big 5 audit firms had a negative impact
on firm value/ MAAR. However, Nekhili and Cherif (2011) did prove (as discussed in section
3.8.1 General that being audited by one of the big 4 audit firms decreases the number of
RPTs, particularly RPTs directly with main shareholders, directors and managers.
44
3.8.5 Ownership
Claessens et al. (1999) investigated whether there is a relation between firm ownership, type
of ownership (family, state, widely-held financial institutions, and widely-held corporations)
and firm value. Their sample consisted of 2,658 companies of nine Asian countries14 in 1996.
They proved that there is a significant positive relation between cash flow rights and firm
value, particularly for widely-held financial institutions. This conclusion is in line with the study
of La Porta et al. (2002), as discussed in section 3.5 Investor protection and legal system;
they also found a positive relation between cash flow rights and firm value, particularly in
countries with a low level of investor protection. However, Claessens et al. (1999) found a
significant negative relation between control rights and firm value, mainly for family-held firms
and widely-held financial institutions. No relation is found between control rights held by
states as well as control rights held by widely-held corporations and firm value. The greater
the difference between cash flow rights and control rights, the greater the decline in firm
value, particularly for family-held firms and widely-held financial institutions in Japan. This
indicates expropriation of minority shareholders.
14
Those Asian countries were: Hong Kong, Indonesia, Japan, Korea, Malaysia, Philippines,
Singapore, Taiwan and Thailand.
45
3.9 Summarizing tables empirical research
Figure 1: Summarizing table empirical research RPTs and earnings management
Authors
Gordon &
Henry (2005)
Chen et al.
(2011)
Object of study
Correlation RPTs and Earnings
Management
Correlation RPTs and Earnings
Management during IPO’s
Sample
331 US-listed companies,
years 2000 en 2001
257 Chinese firms, years
1999 and 2000
Methodology
Outcome
Regression
- Positive relation fixed rate financing and
earnings management;
- Negative relation transactions with executive
board members and earnings management;
- No relation between number of RPTs and
earnings management.
Regression
- Firms report a higher operating performance
in pre-IPO period, making use of RPTs;
- Decrease in amount of operating RPTs
during and after IPO;
- Decrease in operating performance after
IPO.
Figure 2: Summarizing table empirical research RPTs and firm value
Authors
Object of study
Sample
Methodology
Outcome
Kohlbeck and
Mayhew
(2010)
Relation between disclosing RPTs
and firm value (Tobin’s Q)
1,194 firms of S&P 1500
firms for the year 2001 (pre
SOx year)
Regression
- Firms which entered into RPTs had a
significant lower market value and
subsequent return;
- This effect is mainly driven by loan- and
simple transactions with directors, officers and
shareholders.
Nekhili &
Cherif (2011)
Relation between number of RPTs
and firm value (Tobin’s Q)
85 companies listed on the
Paris Stock Exchange for
the years 2002 till 2005
Regression
Total number of RPTs has a negative effect
on firm value.
Relation RPTs and shareholder
value (measured by market
adjusted abnormal returns MAAR)
Financial / ownership and
corporate governance data
of 603 Hong Kong listed
companies and 375 filings
concerning RPTs for the
years 1998 till 2000
Regression
- Negative market adjusted abnormal returns
during announcement of RPTs as well as year
after, so no adjustments ex ante, except firms
with Chinese owners;
- Sales/acquisition of assets equity
relationships cash payments and trading
relations most harmful;
Regression
- 1997-2000: investors devaluate earnings;
- 2001-2003: investors don’t devaluate
earnings;
So, value relevance of disclosed info
increased after introduction of new RPT
fair value measurement regulation.
Cheung et al.
(2006)
Ge et al.
(2010)
Value relevance of RPT disclosure
(impact of RPT disclosures on firm
value)
Top 100 Chinese listed
companies, periods 19972000 and 2001-2003
47
Figure 3: Summarizing table empirical research investor protection
Authors
Object of study
Sample
La Porta et
al. (1998)
- Exploring differences among
countries in legal protection of
investors
- Effects of those differences in legal
protection on firm ownership
La Porta et
al. (1997)
Possibilities of firms among countries
with different level of legal protection
to raise debt and equity
49 countries
Regression
La Porta et
al. (2002)
Relation investor protection, cash
flow rights of main shareholder and
firm value (Tobin’s Q)
539 firms of 27 wealthy
countries (including NL)
Regression
Djankov et
al. (2008)
- Indexing the degree of minority
investor protection against selfdealings with controlling shareholders
- Relation between index number
and financial market development
72 firms (72 countries) for
the year 2003
- Questionnaires
- Regression
49 countries
Methodology
Outcome
Regression
- Investors have the best protection in
common law countries, the worst protection in
French civil law countries;
- Negative correlation between investor
protection and concentration of ownership.
High investor protection results in more
developed capital markets (measured by # of
IPO’s, # of domestic listed firms, and total
amount of private and bond borrowings).
- Negative relation between weak investor
protection (risk of expropriation) and firm
value;
- Positive relation between cash flow rights
and firm value, especially for firms in
countries with low investor protection.
- Significant higher index number (better
minority investor protection) in common law
countries compared to French civil law
countries;
- Countries with higher index numbers have
better developed financial markets (measured
by 5 different indictors).
48
Figure 4: Summarizing table empirical research second listing
Authors
Object of study
Sample
Reese and
Weisbach
(2002)
Relation investor protection, crosslisting in the USA and issuing
shares
2,038 firms between
January 1985 and June
1999, cross-listed on
NYSE, Nasdaq, OTC or
PORTAL
Doidge et al.
(2004)
- Relation between firm value
(Tobin’s Q) and cross-listing in the
USA
- Relation between growth potential
and being cross-listed in the USA
8,680 firms for the year
1997
Relation level of investor protection
and RPTs
Financial / ownership
and corporate
governance data of 603
Hong Kong listed
companies and 375
filings concerning RPTs
for the years 1998 till
2000
Cheung et al.
(2006)
Methodology
Regression
Regression
Regression
Outcome
- Number and value of equity issuing increased
after cross-listing regardless the level of
investor protection;
- Firms listed in countries with low investor
protection are more likely to issue after a
cross-listing and those companies issued
larger volumes;
- Firms with a home listing in a country with
weak investor protection are more likely to
issue shares in their home country or
somewhere else after cross-listing in the USA,
while firms with a home listing in a country with
strong investor protection are more likely to
issue shares in the USA after cross-listing in
the USA.
- Firms which were cross-listed in the USA
have a 16.5% higher Tobin’s Q;
- Firms which were cross-listed in the USA
have significant higher valued growth
opportunities.
Negative relation between level of investor
protection (firms with Chinese owners, crosslisted in Hong Kong) and RPTs.
49
Figure 5: Summarizing table compliance/disclosure studies
Authors
Backhuijs &
Braam (2008)
Object of study
Information provision with regard to
related parties
Sample
73 Dutch companies for
the year 2007
Methodology
Outcome
Disclosure /
compliance
study
- Most companies mentioned parent (96%) and
associated companies (81%) in their
consolidated financial statement
- Companies mainly mentioned the nature of
the transaction and the amount of transaction,
slightly more than half of the firms mentioned
the amount of outstanding balances.
50
Figure 6: Summarizing table empirical research firm characteristics and RPTs / firm value
Authors
Object of study
Sample
Methodology
Nekhili &
Cherif
(2011)
Relation between firm specific
characteristics and number of RPTs
85 companies listed on the
Paris Stock Exchange for
the years 2002 till 2005
Regression
DeFond et
al. (2005)
Relation market reaction and the
appointment of financial experts in
the audit committee of a firm
702 announcements of
appointment of audit
committee members in the
period 1993 till 2002
Regression
Krishnan &
Lee (2009)
Relation between corporate
governance, potential litigation risk
and number of accounting financial
experts in the audit committee
802 Fortune 1000 firms of
2004
Regression
Outcome
- Being listed in the USA has a positive effect on
firm value;
- Being audited by a big 4 audit firm has a
negative effect on firm value;
- Being cross-listed in the USA has a positive
effect on the number of RPTs;
- The number of (direct) RPTs is positively
affected by the percentage of voting rights held
by the main shareholder, the ratio of independent
non-executive directors compared to total
number of directors as well as the size of the
board of directors;
- The independence ratio of the audit committee
and the ratio between financial liabilities and total
debt also increase the number of direct RPTs
- Being audited by one of the big 4 audit firms
decreases the number of RPTs, particularly
RPTs directly with main shareholders, directors
and managers.
Positive market reaction of firms with strong
corporate governance to the appointment of
accounting financial experts audit committee
members, regardless the audit committee
includes a financial expert already.
- The higher the potential litigation risk, the more
likely firms have accounting financial experts in
their audit committee.
- However, this only holds for firms with strong
corporate governance.
51
Dayha et al.
(2008)
- Relation between proportion of
non-related (non-executive) board
members and firm value (Tobins Q)
- Relation between proportion of
non-related (non-executive) board
members and existence of RPTs
with controlling shareholders
799 firms of 22 different
countries for the year 2002
Regression
Claessens et
al. (1999)
Relation firm ownership, type of
ownership and firm value
2,658 firms of 9 Asian
countries for the year 1996
Regression
Relation RPTs and firm/ ownership
characteristics
Financial / ownership and
corporate governance data
of 603 Hong Kong listed
companies and 375 filings
concerning RPTs for the
years 1998 till 2000
Cheung et
al. (2006)
Regression
- Positive relation between firm value (Tobin’s Q)
and the percentage of non-affiliated members of
the board. This relation in stronger in countries
with weak investor protection;
- The higher the proportion of non-affiliated board
members, the less RPTs exists with controlling
shareholders.
- Positive relation between cash flow rights and
firm value, especially for widely held financial
institutions.
- Negative relation between control rights and
firm value, mainly for family-held firms and widely
held financial institutions.
- The greater the difference between cash flow
and control rights, the greater the decline in firm
value for family-held firms and widely-held
financial institutions in Japan
Ownership percentage, low disclosure level and
being audited by a non-big-5 auditor have
negative effect on MAAR.
52
3.10 Summary
This chapter discussed the previous studies in the field of RPTs, investor protection,
earnings management and firm value. First of all, the agency problem is explained; since
ownership (shareholders) and control (board of directors) are separated in Dutch listed
companies, this may result in conflicts of interest. The agency theory is the underlying theory
behind the expropriation of firms’ resources by firms’ management, as well as by the main
shareholder.
The third section explained some researches in the area of RPTs and earnings
management. Those researches are not unambiguous. Chen et al. (2011) concluded that
there is a positive relation between RPTs and earnings management during IPO periods.
However, Gordon and Henry (2005) demonstrated that there was only a positive relation
between one type of RPTs, namely fixed rate financing and earnings management.
Furthermore, they found a negative relation between transactions with executive board
members or the provision of management services and earnings management. So, it is
doubtful whether firms manage earnings to mask expropriation.
The fourth section discussed some studies in the field of RPTs and firm value. All studies
concluded that there is a negative relation between RPTs and firm value. Kohlbeck and
Mayhew (2010) as well as Nekhili and Cherif (2011) found that the negative effect is mainly
driven by transactions with directors, officers and shareholders. However, there is no
consensus which type of transaction are (the most) harmful. Kohlbeck and Mayhew (2010)
proved that the negative relation between RPTs and firm value is mainly driven by loans and
simple transactions, while Cheung et al. (2006) found that sales or acquisition of assets,
equity relationships cash payments and trading relationships are the most harmful. Ge et al.
(2010) concluded that investors devaluate earnings when firms entered in RPTs. However,
this devaluation depends on the degree of disclosure; after the introduction of new disclosure
regulation, investors no longer devaluate earnings. This may indicate that a higher disclosure
level mitigates the negative effect of RPTs on firm value.
The fifth section was devoted to some studies in the field of investor protection by legal
system. Since shareholders bare the risk of expropriation when firms enter into RPTs, they
are less willing to provide money to the capital market, which make it more complicated for
firms to raise capital. To solve this problem, legislation and regulation may be introduced to
increase investor protection, to improve the rights of investors and the information provision
to investors. The studies of La Porta et al. (1997, 1998 and 2002) as well as Djankov et al.
(2008) concluded that there is a difference in investor protection by legal system; common
law countries have a higher level of investor protection compared to French civil law
countries. The level of investor protection has a positive effect on the level of financial market
development.
The subsequent section discussed some studies in the field of cross-listing in the USA, in
order to increase the investor protection level. Reese and Weisbach (2002) found that firms
cross-listed their shares in order to raise capital more easily. Doidge et al. (2004) examined
that firms which are cross-listed in the USA have a higher firm value and growth
opportunities compared to non-cross-listed firms.
Section seven was devoted to (voluntary) disclosure. To determine the level of disclosure, a
disclosure study could be conducted. Backhuijs and Braam (2008) conducted a
disclosure/compliance study in the field of related parties and transactions with those parties.
They found that most companies mentioned parent (96%) and associated companies (81%)
in their consolidated financial statement Furthermore, they found that companies mainly
mentioned the nature of the transaction and the amount of transaction and slightly more than
half of the firms mentioned the amount of outstanding balances.
The eighth section discussed some studies in the field of some firm characteristics (number
of financial experts, composition of the board(s), auditor size and firm ownership) and their
relation with RPTs and firm value. Some characteristics seems to increase the risk of
expropriation, resulting in a positive effect on the number/amount of RPTs (which serves as a
proxy for the risk of expropriation) and a negative effect on firm value (due to the increased
risk of expropriation). Nekhili and Cherif (2011) concluded that some characteristics, like the
ratio of non-executive board members, percentage of voting rights of the main shareholder
and the size of the board of directors had a positive effect on the number of RPTs. However,
Dayha et al. (2008) proved a significant positive relation between the percentage of nonaffiliated board members and firm value. Claessens et al. (1999) found a negative relation
between control rights and firm value.
Other characteristics seems to decrease the risk of expropriation, resulting in a negative
effect on the number /amount of RPTs (which again serves as a proxy for the risk of
expropriation) and a positive effect on firm value (due to the decreased risk of expropriation).
Nekhili and Cherif (2011) concluded that some characteristics, like being audited by a big 5
audit firm and the independence ratio of the audit committee, decreased the number of
RPTs. A positive market reaction on the appointment of accounting financial experts in audit
54
committees was found by DeFond et al. (2005), but this positive reaction only applied to firms
with strong corporate governance. Krishnan and Lee (2009) concluded that the higher the
potential litigation risk, the more likely firms have accounting financial experts in their audit
committee. This again applies only to firms with high corporate governance. Claessens et al.
(1999) proved that there is a positive relation between cash flow rights and firm value,
particularly for widely-held financial institutions; this study is in line with re research of La
Porta et al. (2002) who also found a positive relation, particularly in countries with a low level
of investor protection.
Finally, the last section contains a Summarizing table of all empirical research in this chapter.
55
4. Methodology
4.1 Introduction
This chapter will give an overview of the methodology of my research. First of all, the
problem definition will be explained. Subsequently, the sample will be discussed. After that,
the first part of my research will be explained. In this part, the relation between the amount of
RPTs, the quality of disclosure and firm value will be investigated. Subsequently, the second
part of my research will be explained. In this second part, the relation between corporate
governance and ownership characteristics and the amount of RPTs will be examined.
Thereafter, a panel data analysis of the first two parts of my research will be discussed. In
this part, the regressions will be executed again. However, a panel regression model will be
used, which may give other results. Subsequently, the third part of my research will be
discussed. In this part, I will investigate the differences in the coefficients of the amount of
RPTs and disclosure quality over time. In section eight, my hypotheses will be displayed.
This chapter will be concluded with a short summary in section nine.
4.2 Problem definition
In this thesis, I study the relation between firm value, RPTs, disclosure level and corporate
governance- and ownership characteristics. The central question in my thesis is:
“Is there a relation between the amount of RPTs and firm value and which firm
characteristics affect the amount of RPTs?”
To give a final answer on this research question, I will split up my research in three parts.
The first part of my research will be devoted to the answering of the following sub question:
“Is there a relation between the amount of RPTs, disclosure level on RPTs and firm value?”
The second part of my research will be devoted to the answering of the next sub question:
“Is there a relation between some corporate governance and ownership characteristics and
the amount of RPTs?”
At this point, corporate governance and ownership characteristics cover the size of the
executive board as well as supervisory board, percentage cash flow rights of the main
shareholder, ratio financial experts to total audit committee members, being second listed in
the USA and being audited by a big 4 audit firm.
56
The third part of my research will be devoted to the answering of following sub question:
“Is there a difference in mean and coefficient of the amount of RPTs as well as the disclosure
level on RPTs between 2003 and 2009?”
4.3 Sample
The initial sample of my research consists of the 118 largest firms listed on the Euronext
Amsterdam in 2003 and 2009. Since 2005, those firms are required to report in accordance
with IFRS and since 2004, those firms are obliged to comply with the Dutch corporate
governance code. I have chosen for these years because it covers the pre-corporate
governance code time and a year just after the introduction of the updated version of the
code (code Frijns) in 2009. The size of firms is determined by the total assets of the firm. My
sample consists of the 118 firms with the highest amount of total assets in 2003 and 2009,
based on the available data in Orbis. Since the market capitalisation of 2002 and 2003 is not
available in Orbis, I use Datastream to collect this data for the years 2002 and 2003. I collect
the data on the disclosure of RPTs and corporate governance and ownership characteristics
manually, since most of the data is not available in a database. I use search terms to find the
desired information out of the extensive annual reports. Those search terms can be found in
the appendix (section 10.1 Search terms). Directors’ remuneration is not taken into account
in this research. I use company.info to download the annual reports of the firms of my sample
and Orbis and Datastream to get the remaining data (the control variables). In case of fiscal
years which were not equal to a calendar year, I use the fiscal year 2002-2003 respectively
2008-2009.
The composition of my final sample will be discussed in section 5.1 Introduction
The previous chapter gave an overview of the methodology used to conduct the research.
This chapter will give an overview of the data collection process and the composition of the
final sample. Subsequently, it will discuss the transformation process of the data. Finally, a
short summary will be given.
5.2 Data collection and final sample composition.
4.4 Research part I: Relation RPTs, disclosure quality and firm value
After some scandals like Enron, shareholders associate RPTs with fraudulent activities; they
relate RPTs with expropriation of (minority) shareholders. Due to this negative association,
entering into RPTs should have a negative effect on firm value. This negative effect has been
previously proved by Kohlbeck and Mayhew (2010), Nekhili and Cherif (2011) and Cheung et
al. (2006).
57
This effect will be tested again for a sample of Euronext Amsterdam listed companies, by
investigating the relation between the total amount of RPTs in which a firm have entered and
firm value. The amount of RPTs is used as a proxy for the risk of expropriation. Firm value is
measured by using Tobin’s Q (TQ) ratio ([market capitalisation + debt] divided by total
assets). The amounts of RPTs are collected manually from the annual reports of the 118
largest Euronext listed firms. The total amount of RPTs is determined by summing the
absolute amounts of RPTs with different categories of related parties as mentioned in the
annual report.
The negative effect of RPTs on firm value may be partially mitigated by increasing the
disclosure level of RPTs. Botosan (2006) earlier described the negative relation between
disclosure level and the cost of capital. La Porta et al. (2002) found that there is a negative
relation between weak investor protection (risk of expropriation) and firm value. Furthermore,
Ge et al. (2010) found that after the adoption of RPT fair value measurement regulation,
earnings were no longer devaluated. This may indicate that a higher disclosure level
mitigates the negative effect of RPTs on firm value. Combining those earlier conclusions, it is
a logical assumption that the expected negative effect of RPTs on firm value can be partially
mitigated by disclosing information on those transactions, since more transparency (partially)
recovers the confidence of shareholders. This assumption will be investigated by this
research.
To determine the quality of disclosure (disclosure level), a disclosure study is conducted,
based on the previously conducted disclosure/compliance study concerning RPTs by
Backhuijs and Braam (2009). Generally, disclosure studies are based on the assumption that
“the amount of disclosure on specified topics proxies for the quality of disclosure” (Beattie et
al., 2004, p. 210). This assumption also serves as basis of my disclosure study.
First of all, firms which stated that they did not enter into RPTs are eliminated from the
sample, since the quality of their disclosure could not be tested. For the remaining firms, a
grade from 1 to 11 is determined, depending on whether or not the disclosure on RPTs
contained the following information elements:
1. Entered into RPTs
2. Amount of the transactions;
3. Amount of outstanding balances;
4. Commitments;
5. Provisions of doubtful debts;
6. Expenses in respect of doubtful debts;
58
7. Separation of point 1 to 5 of the following related parties:
o
“parent;
o
entities with joint control or significant influence over the reporting entity;
o
subsidiaries;
o
associates;
o
joint ventures (in which the reporting entity is a venturer);
o
key management of the reporting entity or his parent; or
o
other related parties” (IAS 24.19) in so far as RPTs with those parties appear.
8. Separation of the following type(s) of transactions:
o
“purchases or sales of goods;
o
purchases or sales of property and other assets;
o
rendering or receiving of services;
o
leases;
o
transfers of research and development;
o
transfers under licence agreements;
o
transfers
under
finance
arrangements
(including
loans
and
equity
contributions in cash or in kind);
o
provision of guarantees or collateral;
o
commitments to do something if a particular event occurs or does not occur in
the future, including executory contracts (recognised and unrecognised); and
o
settlement of liabilities on behalf of the entity or by the entity on behalf of that
related party” (IAS 24.21) in so far as those types transactions appear;
9. Whether or not the prices of the transactions were arm’s length prices;
10. Security of outstanding balances;
11. Information on tax risks concerning RPTs.15
Items 1 to 6 are mandatory disclosures under IAS 24. So, this part of the disclosure study
can also be seen as a compliance study. Items 7 to 10 are voluntary disclosures. (IAS 24.21
only describes some examples of RPTs, which should be disclosed. However, reporting firms
are not obliged to separate RPTs by type of transaction, as mentioned under item 7). The
annual reports are screened by making use of search terms. Those terms can be found in
the appendix of this thesis (section 10.1 Search terms). For all above mentioned information
items which can be found in the disclosure regarding RPTs in the annual report, the firm gets
15
Since RPTs are also used to minimize the tax burden (mainly in case of cross border RPTs, by
manipulating the transfer price), some Tax risks may arise. Tax authorities of the different countries
may rectify the determined transfer price, which may result in double taxation. Those risks may be
material risks for the firm. In that case, those risks must be specified in the annual report.
59
one point. By summing the awarded points, a disclosure quality score is determined. A
higher score indicates higher disclosure quality. This score is thereafter divided by the total
obtainable points (in this study 11 points) to determine the disclosure level of a firm.
As control variable, I used Tobin’s Q of the previous year (TQt-1), since I expect firm value of
the previous year affects the firm value of the current year. I use a multiple regression to find
out the relation between the explanatory variables (amount of RPTs and disclosure level)
and the response variable (Tobin’s Q).
This results in the following equation:
𝑇𝑄 = 𝛼0 + 𝛼1 𝑅𝑃𝑇 + 𝛼2 𝐷𝐿 + 𝛼3 𝐶𝑉1 + 𝜀
Where
𝑇𝑄 = 𝑡ℎ𝑒 𝑟𝑒𝑠𝑝𝑜𝑛𝑠𝑒 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑇𝑜𝑏𝑖𝑛′ 𝑠𝑄
𝑅𝑃𝑇 = 𝑡ℎ𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑅𝑃𝑇𝑠
𝐷𝐿 = 𝐷𝑖𝑠𝑐𝑙𝑜𝑠𝑢𝑟𝑒 𝐿𝑒𝑣𝑒𝑙, 𝑎𝑠 𝑑𝑒𝑡𝑒𝑟𝑚𝑖𝑛𝑒𝑑 𝑏𝑦 𝑡ℎ𝑒 𝑐𝑜𝑛𝑑𝑢𝑐𝑡𝑒𝑑 𝑑𝑖𝑠𝑐𝑙𝑜𝑠𝑢𝑟𝑒 𝑠𝑡𝑢𝑑𝑦
𝐶𝑉1 = 𝐶𝑜𝑛𝑡𝑟𝑜𝑙 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 1 (𝑇𝑄𝑡−1 )
4.5 Research part II: Relation CGOCs and PRTs
Secondly, I want to find out which corporate governance- and ownership characteristics
(CGOCs) affect the amount of RPTs. The following CGOCs are tested:
1. Size of executive board (number of executive board members), (SEB);
2. Size of supervisory board (number of the supervisory board members) (SSB);
3. Ratio supervisory board and total board members (RATSB);
4. Percentage of outstanding ordinary shares of main shareholder (MAIN);
5. Level of expertise of audit committee members (ratio financial experts and
total audit committee members) (LEVEL);
6. Whether or not the company is also listed in the USA (strong shareholder protection)
(USA);
7. Whether or not the company is audited by one of the big 4 firms (BIG).
I expect some of above mentioned characteristics have an inhibitory effect on the amount of
RPTs. Those characteristics are:

Size of supervisory board;

Ratio supervisory board members and total members of both boards;

Level of expertise of the audit committee;
60

Listed in the USA;

Audited by one of the big 4 audit firms.
I expect that a large supervisory board, a relative large supervisory board compared to total
members of both boards and an audit committee with more financial experts lead to better
supervision. Better supervision should lead to less risk of expropriation, since this
expropriation could be noticed by the supervisory board / audit committee. This should have
an inhibitory effect on the amount of RPTs, since the amount of RPTs is used as a proxy for
the risk of expropriation. However, the negative relation between the presence of
independent board members in a one tier board, the presence of audit committee and the
number of RPTs is contradicted by the study of Nekhili and Cherif (2011); they concluded a
positive relation between those variables and the number of RPTs. Though, Dayha et al.
(2008) concluded that the higher the proportion of non-affiliated board members, the less
RPTs exists with controlling shareholders. Furthermore, DeFond et al. (2005) found a
positive market reaction of firms with strong corporate governance to the appointment of
accounting financial experts audit committee members, regardless the audit committee
includes a financial expert already. This may indicate that investors are better protected,
which should have a mitigating effect on the amount of RPTs. So, the conclusions of the
earlier conducted studies are not unambiguous.
Being also listed (second listing) in the USA indicates a higher level of shareholder
protection, because US-listed firms are subjected to more and extensive regulation, which
should better ensure the protection of shareholders. So, having a second listing in the USA is
expected to have an inhibitory effect on the amount of RPTs. However, this negative relation
between being listed in the USA and the amount of RPTs is contradicted by the study of
Nekhili and Cherif (2011); they found a positive relation between having a second listing in
the USA and the number of RPTs with subsidiaries and affiliated companies, no relation was
found with other types of related parties.
Being audited by one of the big 4 audit firms should lead to higher audit quality, as explained
by DeAngelo (1981) (section 3.8.4 Auditor type). This should lead to less expropriation, since
this is (earlier) noticed, which have an inhibitory effect. So, being audited by a big 4 audit firm
is expected to have a mitigating effect on the amount of RPTs, since this should reduce the
risk of expropriation. This negative relation is confirmed by the study of Nekhili and Cherif
(2011).
In conclusion, above mentioned characteristics (size of the supervisory board, ratio
supervisory and total board members, level of expertise of the audit committee, being
61
(second) listed in the USA and being audited by a big 4 audit firm) are expected to decrease
the amount of RPTs, since those characteristics decrease the risk of expropriation.
I expect some of above mentioned characteristics have a stimulatory effect on the amount of
RPTs. Those characteristics are:

Size of the executive board;

Percentage of outstanding ordinary shares of the main shareholder.
I expect that a large executive board bears a risk of collusion, which is an incentive to enter
into RPTs, which increase the amount of RPTs. Due to a separation of duties within the
board of directors as a result of a large board, some directors could collude together, or not
all directors are aware of all affairs. This may result in the expropriation of firms’ resources.
This positive relation between the size of the board of directors and the number of RPTs is
earlier proved by Nekhili and Cherif (2011). However, in their case, the size of the board of
directors in a one tier system was tested.
Secondly, more voting rights compared to cash flow rights of the main shareholder or voting
power of the main shareholder in general should lead to a higher risk of expropriation of the
minority shareholder; the main shareholder might try to increase his yield by entering into
RPTs with the firm. As a result, he gathered more than his fair share (based on his cash flow
rights) at the cost of the minority shareholder. Since the percentage of voting rights of the
main shareholder is not available for (most of) the companies of my sample, I use the
percentage of ordinary shares as an approximation of the voting power of the main
shareholder. Nekhili and Cherif (2011) showed previously a positive relation between the
voting rights of the main shareholder and the number of RPTs. However, they did not found
evidence for a positive relation between the separation of cash flow rights and voting power
of the main shareholder and the number of RPTs.
In conclusion, above mentioned characteristics (size of the executive board and percentage
of outstanding shares of the main shareholder) are expected to increase the amount of
RPTs, since those characteristics increase the risk of expropriation.
As a control variable, the size of the company (natural logarithm of total assets) is used,
since I expect firm size positively affects the amount of RPTs. Once again, I use a multiple
regression to find out the relation between the explanatory variables (corporate governance
and ownership characteristics) and the response variable (amount of RPTs).This results in
the following equation:
62
𝑅𝑃𝑇 = 𝛽0 + 𝛽1 𝑆𝐸𝐵 + 𝛽2 𝑆𝑆𝐵 + 𝛽3 𝑅𝐴𝑇𝑆𝐵 + 𝛽4 𝑀𝐴𝐼𝑁 + 𝛽5 𝐿𝐸𝑉𝐸𝐿 + 𝛽6 𝑈𝑆𝐴 + 𝛽7 𝐵𝐼𝐺 + 𝛽8 𝐶𝑉2 + 𝜀
Where:
𝑅𝑃𝑇 = 𝑡ℎ𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑅𝑃𝑇𝑠
𝑆𝐸𝐵 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑡ℎ𝑒 𝑒𝑥𝑒𝑐𝑢𝑡𝑖𝑣𝑒 𝑏𝑜𝑎𝑟𝑑 𝑚𝑒𝑚𝑏𝑒𝑟𝑠
𝑆𝑆𝐵 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑡ℎ𝑒 𝑠𝑢𝑝𝑒𝑟𝑣𝑖𝑠𝑜𝑟𝑦 𝑏𝑜𝑎𝑟𝑑 𝑚𝑒𝑚𝑏𝑒𝑟𝑠
𝑅𝐴𝑇𝑆𝐵 =
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑢𝑝𝑒𝑟𝑣𝑖𝑠𝑜𝑟𝑦 𝑏𝑜𝑎𝑟𝑑 𝑚𝑒𝑚𝑏𝑒𝑟𝑠
𝑡𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑏𝑜𝑎𝑟𝑑 𝑚𝑒𝑚𝑏𝑒𝑟𝑠
𝑀𝐴𝐼𝑁 = 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑓 𝑡ℎ𝑒 𝑚𝑎𝑖𝑛 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟
𝐿𝐸𝑉𝐸𝐿 =
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑒𝑥𝑝𝑒𝑟𝑡𝑠
𝑡𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑎𝑢𝑑𝑖𝑡 𝑐𝑜𝑚𝑚𝑖𝑡𝑡𝑒𝑒 𝑚𝑒𝑚𝑏𝑒𝑟𝑠
𝑈𝑆𝐴 = 𝑤ℎ𝑒𝑡𝑒𝑟 𝑡ℎ𝑒 𝑓𝑖𝑟𝑚 ℎ𝑎𝑠 𝑎 𝑠𝑒𝑐𝑜𝑛𝑑 𝑙𝑖𝑠𝑡𝑖𝑛𝑔 𝑖𝑛 𝑡ℎ𝑒 𝑈𝑆𝐴 (𝑑𝑢𝑚𝑚𝑦 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒)
𝐵𝐼𝐺 = 𝑤ℎ𝑒𝑡ℎ𝑒𝑟 𝑡ℎ𝑒 𝑓𝑖𝑟𝑚 𝑖𝑠 𝑎𝑢𝑑𝑖𝑡𝑒𝑑 𝑏𝑦 𝑎 𝑏𝑖𝑔 4 𝑎𝑢𝑑𝑖𝑡 𝑓𝑖𝑟𝑚 (𝑑𝑢𝑚𝑚𝑦 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒)
𝐶𝑉2 = 𝐶𝑜𝑛𝑡𝑟𝑜𝑙 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 2 (𝑓𝑖𝑟𝑚 𝑠𝑖𝑧𝑒, 𝑚𝑒𝑎𝑠𝑢𝑟𝑒𝑑 𝑏𝑦 𝑛𝑎𝑡𝑢𝑟𝑎𝑙 𝑙𝑜𝑔𝑎𝑟𝑖𝑡ℎ𝑚 𝑜𝑓 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠)
4.6 Panel data analysis research part I & II
After the execution of the ‘normal’ regressions for research part I and II as described in the
previous sections, I use another method to analyse my data; panel data analysis. This may
give some other results than the normal regressions as discussed in section 4.4 Research
part I: Relation RPTs, disclosure quality and firm value and 4.5 Research part II: Relation
CGOCs and PRTs. I merge my data of 2003 and 2009 into one dataset. This dataset
consists of data of the same units (same Dutch listed firms) with repeated observations over
different time periods (years 2003 and 2009). The data is characterized by the fact that it has
two dimensions; an individual dimension per firm (index i) and a time dimension (index t).
There are two types of panel data models:
1. Random effects model:
𝑇𝑄𝑖𝑡 = 𝛼 + 𝛽1 𝑅𝑃𝑇𝑖𝑡 + 𝛽2 𝐷𝐿𝑖𝑡 + 𝛽3 𝐶𝑉1𝑖𝑡 + 𝑈𝑖𝑡
Where:
𝑇𝑄 = 𝑇𝑜𝑏𝑖𝑛′ 𝑠 𝑄
𝑖 = 𝑑𝑢𝑡𝑐ℎ 𝑙𝑖𝑠𝑡𝑒𝑑 𝑓𝑖𝑟𝑚
𝑡 = 𝑦𝑒𝑎𝑟
63
𝛼 = 𝑖𝑛𝑡𝑒𝑟𝑐𝑒𝑝𝑡
𝛽 = 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡
𝑅𝑃𝑇 = 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑅𝑃𝑇𝑆
𝐷𝐿 = 𝑑𝑖𝑠𝑐𝑙𝑜𝑠𝑢𝑟𝑒 𝑙𝑒𝑣𝑒𝑙
𝐶𝑉₁ = 𝑐𝑜𝑛𝑡𝑟𝑜𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 1: 𝑇𝑄𝑡−1
𝑈𝑖𝑡 = 𝜇𝑖 + 𝜀𝑖𝑡 (𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝑒𝑛𝑡𝑖𝑡𝑦 𝑟𝑒𝑠𝑝𝑒𝑐𝑡𝑖𝑣𝑒𝑙𝑦 𝑤𝑖𝑡ℎ𝑖𝑛 𝑒𝑛𝑡𝑖𝑡𝑦 𝑒𝑟𝑟𝑜𝑟 𝑡𝑒𝑟𝑚)
This results in the final random effects model equation:
𝑇𝑄𝑖𝑡 = 𝛼 + 𝛽1 𝑅𝑃𝑇𝑖𝑡 + 𝛽2 𝐷𝐿𝑖𝑡 + 𝛽3 𝐶𝑉1𝑖𝑡 + 𝜇𝑖 + 𝜀𝑖𝑡
Where:
𝜇 = 𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝑒𝑛𝑡𝑖𝑡𝑦 𝑒𝑟𝑟𝑜𝑟 𝑡𝑒𝑟𝑚
𝜀 = 𝑤𝑖𝑡ℎ𝑖𝑛 𝑒𝑛𝑡𝑖𝑡𝑦 𝑒𝑟𝑟𝑜𝑟 𝑡𝑒𝑟𝑚
2. Fixed effects model:
𝑇𝑄𝑖𝑡 = 𝛼𝑖 + 𝛽1 𝑅𝑃𝑇𝑖𝑡 + 𝛽2 𝐷𝐿𝑖𝑡 + 𝛽3 𝐶𝑉1𝑖𝑡 + 𝜀𝑖𝑡
The random effects model assumes that the independent variables (RPT it, DLit and CV1it are
strictly exogenous, which means that those could not be dependent of past, current or future
values of the error term. So, in case of the random effects model, the independent variables
should not be dependent of either µi or εit, which together constitute the error term. However,
it is doubtful whether one or more explanatory variables are independent of µi. The fixed
effects model deals with this problem by adding an individual intercept term (αi), which
replaced the μi of the random effects model. The fixed effects model assumes that all
coefficients (β1, β2 and β3) are the same across both dimensions (index i and index t).
To determine which of above mentioned models should be used, the Hausman test should
be conducted. This test tests whether the predictors’ µi and the independent variables are
correlated. In case of correlation, the fixed effect model is the appropriate model. In case no
correlation is proved, the random effects model can be used. The appropriate model (as
determined by the conducted Hausman test) is used to conduct the panel regressions for
research part I and II.
4.7 Research part III: effectiveness Dutch corporate governance code
Finally, I want to find out whether the Code Tabaksblat and / or the updated version of the
code (Code Frijns) have a positive effect on the protection of (minority) shareholders. The
64
data is split up into 2 periods:
1. before the first Dutch corporate governance code came into force (2003);
2. after the code Frijns came into force (2009).
I investigate whether the amount of RPTs has decreased over time. Besides this, I
investigate whether or not disclosure quality has increased over time. This is investigated by
running T-tests. The Dutch corporate governance code should increase a firms’ transparency
and thus limits the possibility of opportunistic behaviour. So, the code should result in less
risk of expropriation. Since the amount of RPTs is a proxy for the risk of expropriation, the
amount of RPTs should decrease over time. Besides this, the quality of disclosure should
increase over time, due to the increased transparency of firms after the introduction of the
code.
Subsequently, the effectiveness of the code is tested by comparing the coefficient of the
explanatory variables amount of RPTs and Disclosure level in the different periods. I
investigate whether or not the amount of RPTs (still) has a negative effect on firm value after
the updated version (Code Frijns) came into effect and whether or not the negative effect
diminished over time. This diminishing effect indicates that the corporate governance code
resulted in an increase of investor protection; the explanatory power of RPTs (and thus risk
of expropriation) decreased over time, so shareholders experienced RPTs less negative over
time.
Besides this, I explore whether or not disclosure level (still) has a positive effect on firm value
(a mitigating effect of the negative effect of the amount of RPTs on firm value) after the Code
Frijns came into force. Moreover, I investigate whether or not the positive effect increased
over time. I expect this effect increased over time, since I expect disclosure quality
increased, which strengthened the mitigating effect of disclosure quality.
4.8 Hypotheses
My research tests the following 13 alternative hypotheses:
First part: Relation RPTs, disclosure level and firm value:
1. H1: The amount of RPTs negatively affects firm value.
2. H1: High disclosure level on RPTs mitigates the negative effect of RPTs on firm value.
Second part: Relation RPTs and Corporate Governance and Ownership Characteristics:
3. H1: A large executive board increases the amount of RPTs.
65
4. H1: A large supervisory board decreases the amount of RPTs.
5. H1: A high ratio of supervisory board members decreases the amount of RPTs.
6. H1: A high percentage of ordinary shares of the main shareholder increases the
amount of RPTs.
7. H1: A high level of expertise of the audit committee (high financial expert ratio)
decreases the amount of RPTs.
8. H1: Second-listing in the USA decreases the amount of RPTs.
9. H1: Being audited by one of the big 4 audit firms decreases the amount of RPTs.
Third part: Relation Code Frijns, RPTs, disclosure quality & company’s value:
10. H1: After Code Frijns came into force, the amount of RPTs has decreased.
11. H1: After Code Frijns came into force, disclosure quality has increased.
12. H1: After Code Frijns came into force, the negative effect of RPTs on firm value
diminished.
13. H1: After Code Frijns came into force, the positive effect of disclosure quality on firm
value increased.
4.9 Summary
This chapter described the research method. The research consisted of three parts. The first
part is about the relation between the amount of RPTs, disclosure level and firm value. The
second part regards the relationship between some corporate governance and ownership
characteristics and RPTs. After this, the first two parts are repeated by using another model:
a panel regression model. Finally, the last part of the research investigates the differences
between the explanatory variables over time and the explanatory power of those variables.
This chapter discussed the relationships between the variables in detail, as well as the
corresponding hypotheses. The next chapter will give an overview of the data collection
process, the final sample composition and the transformation of the data.
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5. Data collection and data transformation
5.1 Introduction
The previous chapter gave an overview of the methodology used to conduct the research.
This chapter will give an overview of the data collection process and the composition of the
final sample. Subsequently, it will discuss the transformation process of the data. Finally, a
short summary will be given.
5.2 Data collection and final sample composition
My initial sample consisted of the 118 largest Dutch listed firms according to the Orbis
database. The selection criteria for my initial sample were:

All active companies or companies with an unknown status;

Main stock exchange: Euronext Amsterdam;

Total assets (in EUR): periods 2003 and 2009, top 250.
After that, I eliminated 19 firms manually, because those firms were listed on the Euronext for
only one of both years. This selection was based on IPO date and delisted date data
according to the Orbis database. Those firms were eliminated from my data, since I want to
compile a panel dataset; the dataset should contain repeated observations on the same units
(Verbeek, 2011). After this elimination, 99 companies remained in my sample.
For 1 company, no annual report was available at company.info (Nieuwe Steen Investments
N.V.). So, after the elimination of this company, my final sample consisted of 98 firms. The
composition of my sample is summarised in the following table:
Sample composition
Initial Orbis sample
Number of
firms
118
Elimination of firms which were only listed in one of both years
-/-19
Elimination of firm for which no annual reports were available
-/-1
Final sample
Figure 7: Sample composition
98
A list of all the firms in my sample could be found in the appendix (section 10.2 Composition
of final sample).
5.3 Data transformation
After the collection of the data, the data was transformed into the final dataset. First of all,
Tobin’s Q was calculated for the years 2002, 2003, 2008 and 2009 using the following
67
formula:
𝑇𝑄 =
(Market capitilisation in millions ∗ 1,000,000) + Total Liabilities and debt
Total Assets
Tobin’s Q for the years 2002 and 2008 serve as CV1, Tobin’s Q for the years 2003 and 2009
serve as dependent variable in the first part of my research.
Furthermore, I collected the data about the disclosure on RPTs manually. I explored for
every firm whether or not their disclosure consists of the 11 information elements. For every
information element which was found in their disclosure, the firm achieved 1 point. To
determine the disclosure level on RPTs, I summed the total achieved points. Besides this, I
determined how many points a firm could achieve. Firms which disclosed that they did not
enter into RPTs could maximally achieve 1 point, since they did not have to disclose further
information. Since those firms always achieve the maximum achievable points, no final
disclosure level ratio was determined for those firms (the cells are left black). Firms which
disclosed no information about RPTs at all also got no final disclosure level ratio. Firms
which disclosed that they enter into RPTs could maximally achieve 11 points, since those
firms had the ability to give further information about the transactions. For those firms, a
disclosure level ratio was determined by dividing the achieved points by eleven. The
disclosure level ratio was determined for the years 2003 as well as 2009.
Also the level of expertise of the audit committee had to be determined from the collected
data. Since only firms with a supervisory board of at least four members should have a
separated audit committee16, only for these firms an expertise level was determined. This
was achieved by dividing the number of financial experts of the audit committee by the
number of total audit committee members. In case the supervisory board consisted of at
least four members, but no information about the audit committee and/or financial expert
could be found in the annual report, the expert level was set on zero. For firms with a
supervisory board of less than four members or firms with an unknown number of
supervisory board members, no expertise level was determined. The corporate governance
code came into force in 2004, so it was not mandatory to have a separated audit committee
in 2003. However, to keep the data comparable, the expertise level was determined in the
same way for 2003.
Besides the expertise level of the audit committee, the natural logarithm of Total Assets was
16
Paragraph III.5 Dutch corporate governance code 2009 (Code Frijns as well as Code Tabaksblat)
68
calculated for the years 2003 and 2009, which serves as CV2. Furthermore, the data about
the auditor type (big 4 or non-big 4) and whether the firm had a second listing in the USA
was transformed into a dummy variable. ‘Yes’ is transformed into a 1 and ‘No’ is transformed
into a 0.
This transformed data is used for the statistical analysis. The results of this statistical
analysis can be found in the next chapter.
5.4 Summary
This chapter described an overview of the data collection process and the final composition
of my sample. Furthermore, it gave an overview of the data transformation process; the raw
data should be transformed into a final dataset. Some ratios were calculated, some data was
transformed into dummy variables. The final dataset is used for the statistical analysis. The
results of my research and the analysis of those results will be discussed in the next
chapters.
69
6. Empirical results
6.1 Introduction
This chapter covers the results of my research and the analysis of those results. First of all, a
summary of my variables and my data will be given. This part includes the results of the
conducted disclosure study. After that, the results of the first part of my research will be
explained; this part investigates the relation between firm value (TQ), the amount of RPTs
and disclosure level. Subsequently, the results of the second part of my research will be
discussed; this part is about the relation between RPTs and some corporate governanceand ownership characteristics. After that, the results of the conducted panel data regression
will be explained. In section seven, the results of the final part of my research will be
discussed. This part covers a comparison of the years 2003 and 2009 with regard to the
amount of RPTs, disclosure level and the negative- respectively positive effect of those
variables on firm value. At the end of all sections, the alternative hypotheses of section 4.8
Hypotheses will be confirmed or rejected. Section eight will be devoted to the limitations of
my research. This chapter will again be concluded with a summary.
6.2 Summary of variables
As described in section 5.2 Data collection and final sample composition, the final sample
consisted of the 98 largest Euronext Amsterdam listed firms. Firm size was measured by
Total Assets in 2003 and 2009. The sample included only firms which were listed in 2003
and 2009, not firms which were listed in only one of those years. For this sample, data of
different variables was collected. The data was mainly hand collected, since most of the data
was not available in databases. Only some data for the calculation of Tobin’s Q ratio and firm
size are collected from Orbis and Datastream. An overview of all used variables in this study
can be found in the figure below:
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Explanatory influence
Variable
Acronym
Variable Type
Firm value
Tobin´s Q ratio
TQ
Continuous
Expropriation
Amount of RPTs
RPT
Continuous
Transparency
Corporate governance
and ownership
characteristics
Disclosure level
DL
Continuous
Number of executive board
members
SEB
Continuous
Number of supervisory board
members
SSB
Continuous
Ratio supervisory board/total
board members
RATSB
Continuous
Percentage of outstanding
shares main shareholder
MAIN
Continuous
Level of expertise audit
committee
LEVEL
Continuous
Second listing in the USA
USA
Categorical
(Binary)
Being audited by a big 4 audit
firm
BIG
Categorical
(Binary)
Tobin´s Q ratio t-1
CV1
Continuous
CV2
Continuous
Control variables
Firm Size
Figure 8: Overview of variables
6.3 Descriptive statistics
This section describes the collected data of 2003 and 2009. As mentioned before, the final
sample consisted of the 98 largest Euronext listed firms. A distinction is made between the
years 2003 and 2009. A list of all the firms of my sample can be found in the appendix in
section 10.2 Composition of final sample. I used Stata and SPSS to analyse my data.
6.3.1 Disclosure study
An important part of my research was the conducted disclosure study. For the years 2003 as
well as the year 2009, the disclosure level in the field of RPTs was determined for the
companies of my sample. The results of the disclosure study of 2003 as well as 2009 are
shown below:
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Figure 9: Results disclosure study 2003 and 2009
For the year 2003, 31 (31.6%) of the 98 companies of my sample disclosed whether or not
they entered into RPTs. Only 1 of these 31 firms mentioned they did not enter into RPTs. So,
for this firm no disclosure level ratio is determined. The other 30 companies (30.6% of the
total sample) did enter into RPTs. Of those 30 companies, 20 companies (66.6% of the RPT
companies) disclosed the amount of RPTs. So, in total, 21 of the 31 firms of the sample
(21.2% of the total sample) disclosed the amount of RPTs in their annual report of 2003
(including 1 company which disclosed an amount of 0).
For the year 2009, 74 (75.5%) of the 98 companies of my sample disclosed whether or not
they entered into RPTs. Of those companies, 9 companies disclosed they did not enter into
RPTs. So, again, for those 9 firms, no disclosure level ratio is determined. The other 65
companies (66.2% of the total sample) did enter into RPTs. Of those 65 companies, 52
companies (80% of the RPT companies) disclosed the amount of RPTs. So, in total, 61 of
these 74 firms of the sample (62.2% of the total sample) disclosed the amount of RPTs in
their annual report of 2009 (including 9 companies which disclosed an amount of 0).
6.3.2 Descriptive statistics 2003
The correlation matrix below shows the correlation between all variables for the year 2003:
72
Figure 10: Correlation matrix variables year 2003
Due to high collinearity, Stata ommitted already the BIG variable for the year 2003 (high
correlation between BIG and CV2). This variable will be not taken into account in the multiple
regression analysis in 2003.
The results of the disclosure study of 2003, as showed in the previous section, were used for
the determination of the disclosure level ratio of all companies for the year 2003. This ratio
was one of the independent variables of the first part of the research. The table below
contains a summary of the data of the first part of my research for the year 2003:
Figure 11: Descriptive statistics research part I year 2003
As mentioned in the previous section, only 31 of the 98 firms of the sample (31.6%)
mentioned in their annual report of 2003 whether or not they entered into RPTs. Only 1 of
these 31 firms mentioned they did not entered into RPTs. So, for this firm no disclosure level
ratio is determined. The other 30 firms could obtain a maximum of 11 points. The disclosure
of these firms consisted of at least 2 information elements (minimum disclosure level ratio of
0.182) and maximum 8 information elements (maximum disclosure level ratio of 0.727). Only
21 of the 31 firms of the sample (21.2% of the total sample) disclosed the amount of RPTs in
their annual report of 2003 (including 1 company which disclosed an amount of 0).
73
The second part of my research was aimed to investigate the relation between the amount of
RPTs and some corporate governance and ownership characteristics. The table below
contains a summary of the collected data of this part of the research for the year 2003:
Figure 12: Descriptive statistics research part II year 2003
The annual reports of 2003 consisted in 96 cases the number of supervisory board
members. Of those firms, 70 firms have a supervisory board of at least 4 members, so a
separated audit committee would be obliged from 2004. To make the data of 2003 and 2009
comparable, the level of expertise of the audit committee is determined as if an audit
committee is already required for supervisory boards consisting of 4 or more members for
the year 2003. So, for those firms, the level of expertise of this audit committee is determined
by calculating the ratio of financial experts/total audit committee members. In case no
separated audit committee and/or financial experts are mentioned in the annual report, the
ratio is determined at 0.
6.3.3 Descriptive statistics 2009
The correlation matrix below shows the correlation between all variables for the year 2009:
Figure 13: Correlation matrix variables year 2009
74
For the year 2009, there is no high collinearity between BIG and other independent variables,
so this time, BIG is taken into account in the multiple regression.
The table below contains a summary of the data of the first part of my research for the year
2009:
Figure 14: Descriptive statistics research part I year 2009
As mentioned in section 6.3.1 Disclosure study, for the year 2009, 74 of the 98 companies of
my sample (75.5%) disclosed whether or not they entered into RPTs. Of those companies, 9
companies disclosed they did not enter into RPTs. So, for those firms, no disclosure level
ratio was determined. The other 65 companies could again obtain 11 points. The disclosure
of these firms consisted of at least 1 information element (minimum disclosure level ratio of
0.091) and maximum 8 information elements (maximum disclosure level ratio of 0.727). 61 of
the 74 firms of the sample (62.2% of the total sample) disclosed the amount of RPTs in their
annual report of 2009 (including 9 companies which disclosed an amount of 0).
The table below contains a summary of the collected data of the second part of the research
for the year 2009:
Figure 15: Descriptive statistics research part II year 2009
The annual reports of 2009 consisted in 97 cases the number of supervisory board
members. Of those firms, 72 firms have a supervisory board of at least 4 members, so a
separated audit committee is mandatory. For those firms, the level of expertise of this audit
75
committee is determined by calculating the ratio of financial experts / total audit committee
members. Again, in case no separated audit committee and/or financial experts are
mentioned in the annual report, the ratio is determined at 0.
6.3.4 Dummy variables
Two of the variables of the second part of my research are dummy variables. The dummy
variables are visualized by the tables below:
Figure 16: Second listing
Figure 17: Auditor type
For the year 2003, only 14 (14.3%) of the firms have a second listing in the USA, and 89
firms (90.8%) is audited by one of the big 4 firms; KPMG serves the highest part of the firms
of my sample (28 firms, 28.6% of the total sample). For the year 2009, only 7 (7.1 %) of the
firms have a second listing in the USA, and 83 firms (84.7%) is audited by one of the big 4
firms; KPMG again serves the highest part of the firms of my sample (30 firms, 30.6% of the
total sample).
The distribution between the big 4 audit firms is shown in the table below:
Figure 18: Distribution big 4 auditor
6.4 Research part I: RPTs, disclosure quality and firm value
In the first part of my research, I investigate whether there is a relation between the amount
of RPTs, disclosure level and firm size.
The regression equation is as follows:
𝑇𝑄 = 𝛼0 + 𝛼1 𝑅𝑃𝑇 + 𝛼2 𝐷𝐿 + 𝛼3 𝐶𝑉1 + 𝜀
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The results of the multiple regressions are shown in this section.
6.4.1 Research part I 2003
The results of the multiple regression of part I of my research for the year 2003 are shown in
the table below:
Figure 19: Multiple regression Part I output 2003
As shown in the table above, for the year 2003, not any of the independent variables has a
significant impact on firm value, except the control variable (TQt-1, firm value of the previous
year); all other P-values are greater than 0.05. Besides this, the coefficient of disclosure level
(DL) is negative, which means that disclosure level has a negative effect on firm value; this is
the reverse of the expected effect. However, this effect is not significant. Also remarkable is
the coefficient of the amount of RPTs (RPTs); this coefficient has a positive value, which
means that the amount of RPTs has a positive effect on firm value. Again, this effect was the
reverse of the expected effect (but again, not significant).
Because not any of the variables has a significant effect on firm value, none of the
hypotheses 1 and 2, as mentioned in section 4.8 Hypotheses could be accepted (the null
hypotheses could not be rejected).
The conclusion that there is no significant negative relation between the amount of RPTs and
firm value is not in line with the results of the studies of Nekhili and Cherif (2011), Cheung et
al. (2006) and Kohlbeck and Mayhew (2010) They all proved a significant negative relation
between RPTs (measured by the amount or number of RPTs) and firm value.
6.4.2 Research part I 2009
The results of the multiple regression of part I of my research for the year 2009 are shown in
the table below:
77
Figure 20: Multiple regression Part I output 2009
As shown in the table above, for the year 2009, again not any of the independent variables
has a significant impact on firm value, except the control variable (TQt-1, firm value of the
previous year); all other P-values are greater than 0.05. For the year 2009, the coefficient of
disclosure level (DL) is positive, which is, in contrast with the year 2003, in line with the
expectations. The coefficient of the amount RPTs is positive, which is again not in line with
my expectations.
Because not any of the variables has a significant effect on firm value, none of the
hypotheses 1 and 2, as mentioned in section 4.8 Hypotheses could be accepted (the null
hypotheses could not be rejected).
Again, the conclusion that there is no significant negative relation between the amount of
RPTs and firm value is not in line with the results of the studies of Nekhili and Cherif (2011),
Cheung et al. (2006) and Kohlbeck and Mayhew (2010) They all proved a significant
negative relation between RPTs (measured by the amount or number of RPTs) and firm
value.
6.5 Research part II: CGOCs and RPTs
In the second part of my research, I investigated whether there is a relation between some
corporate governance- and ownership characteristics and the amount of RPTs. The
regression equation is as follows:
𝑅𝑃𝑇 = 𝛽0 + 𝛽1 𝑆𝐸𝐵 + 𝛽2 𝑆𝑆𝐵 + 𝛽3 𝑅𝐴𝑇𝑆𝐵 + 𝛽4 𝑀𝐴𝐼𝑁 + 𝛽5 𝐿𝐸𝑉𝐸𝐿 + 𝛽6 𝑈𝑆𝐴 + 𝛽7 𝐵𝐼𝐺 + 𝛽8 𝐶𝑉2 + 𝜀
The results of the multiple regressions are shown in this section.
78
6.5.1 Research part II 2003
The results of the multiple regression of part II of my research for the year 2003 are shown in
the table below:
Figure 21: Multiple regression Part II output 2003
As shown in the table above, for the year 2003, again not any of the independent variables
has a significant impact on the amount of RPTs, all P-values are much greater than 0.05.
(BIG was omitted due to collinearity). Besides this, the coefficient of the ratio supervisory
board members / total board members (RATB) is positive, which means that this ratio has a
positive effect on the amount of RPTs; this is the reverse of the expected effect. Also
noticeable is the coefficient of the percentage of ordinary shares of the main shareholder
(MAIN); this coefficient has a negative value, which means that the higher the percentage of
ordinary shares of the main shareholder, the smaller the amount of RPTs is. Again, this
effect was the reverse of the expected effect. Also the positive effect of being second listed in
the USA (USA) was the reverse of the expected effect (negative effect on the amount of
RPTs).
Because not any of the variables has a significant effect on the amount of RPTs, again none
of the hypotheses 3-9, as mentioned in section 4.8 Hypotheses could be rejected (the null
hypotheses could not be rejected).
My results are not in line with the results of the study of Nekhili and Cherif (2011) They found
a significant positive relation between being cross-listed in the USA, the percentage of voting
rights held by the main shareholder, the ratio of non-executive directors, the size of the board
of directors, the independence ratio of the audit committee and the number of RPTs.
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Furthermore, they found a negative relation between being audited by a big 4 audit firm and
the number of RPTs.
6.5.2 Research part II 2009
The results of the multiple regression of part II of my research for the year 2009 are shown in
the table below:
Figure 22: Multiple regression Part II output 2009
As shown in the table above, for the year 2009, only one of the independent variables has a
significant impact on the amount of RPTs, only the P-value of MAIN is smaller than 0.05. So,
the percentage of ordinary shares of the main shareholder has a significant positive
effect on the amount of RPTs for the year 2009. Besides this, the control variable (natural
logarithm of total assets) has a significant impact on the amount of RPTs.
Furthermore, the coefficient of number of executive board members (SEB) is negative, which
means that the number of executive board members has a negative effect on the amount of
RPTs; this is the reverse of the expected effect. Also noticeable is the coefficient of the
number of supervisory board members (SSB); this coefficient has a positive value, which
means that the higher the number of supervisory board members, the greater the amount of
RPTs is. Again, this effect was the reverse of the expected effect. Furthermore the positive
effect of the ratio supervisory board members divided by total board members (RATSB) and
being listed in the USA (USA) was the reverse of the expected effect (just as for the year
2003). The positive coefficient of being audited by one of the big 4 audit firms (BIG) was the
reverse of the expected effect as well.
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So, only hypothesis 6 of the hypotheses as mentioned in section 4.8 Hypotheses, A high
percentage of ordinary shares of the main shareholder increases the amount of RPTs, could
be accepted for the year 2009. All other null hypotheses could not be rejected.
One of my results, the significant positive relation between the percentage of ordinary shares
of the main shareholder and the amount of RPTs is more or less in line with the result of the
study of Nekhili and Cherif (2011); they found a significant positive relation between the
percentage of voting rights of the main shareholder and the number of RPTs. The other
results are, just as for the year 2003, not in line with the results of Nekhili and Cherif (2011).
6.6 Panel analysis research part I & II
After the execution of the ‘normal’ regressions for research part I and II, I used another
method to analyse my data; panel data regression. I expected that this may give some other
results than the normal regressions as discussed above. I merged my data of 2003 and 2009
to one dataset. This dataset consisted of data of the same units (same Dutch listed firms)
with repeated observations over different time periods.
6.6.1 Hausman tests
To determine the appropriate model of the two panel data models (as explained in section
4.6 Panel data analysis research part I & II, I run the Hausman test. The results for research
part I and II can be found in the appendix (section 10.3 Results Hausman test).
Both Hausman tests indicate that the random effects model is the appropriate model. So, the
regression for research part I as well as research part II is executed using the random effects
model.
6.6.2 Panel data analysis research part I
The results of the panel data regression (using the random effects model) of the first part of
my research can be found below:
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Figure 23: Multiple regression panel data, random effects model, research part I
No significant relation was found between the independent variables (amount of RPTs and
Disclosure level) and the dependent variable Tobin’s Q). Only the control variable (CV1,TQ
1)
t-
has a significant effect on firm value. Again, because not any of the variables has a
significant effect on firm value, none of the hypotheses 1 and 2, as mentioned in section 4.8
Hypotheses could be accepted (the null hypotheses could not be rejected). This is in line with
the results of the ‘normal’ regressions as discussed in section 6.4.1 Research part I 2003
and 6.4.2 Research part I 2009. So again, my results do not correspond with the results of
Nekhili and Cherif (2011).
6.6.3 Panel data analysis research part II
The results of the panel data regression (using the random effects model) of the second part
of my research can be found below:
82
Figure 24: Multiple regression panel data, random effects model, research part II
A significant positive relation was found between the independent variable USA (second
listing in the USA) and the dependent variable amount of RPTs. This differs from the
hypothesis; I expected a significant negative relation between a second listing in the USA
and the amount of RPTs. I also found a significant positive relation between CV2 (control
variable 2: natural logarithm of Total Assets) and the amount of RPTs. This conclusion is not
in line with the results of the ‘normal’ regressions as discussed in section 6.5.1 Research part
II 2003 (no significant relations at all) and section 6.5.2 Research part II 2009 (significant
positive percentage of ordinary shares main shareholder (MAIN) and amount of RPTs
(RPTS)).
So, all the hypotheses as mentioned in section 4.8 Hypotheses (hypotheses 3 till 9) could not
be accepted (the null hypotheses could not be rejected).
However, one of my results (significant positive relation between being second-listed in the
USA and the amount of RPTs) is more or less in correspondence with one of the results of
Nekhili and Cherif (2011). They also found a significant positive between being cross-listed in
the USA and the number of RPTs.
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6.7 Research part III: effectiveness Dutch corporate governance code
In de final part of my research, I tried to find out whether the Code Tabaksblat and the
updated version of the code (Code Frijns) had a positive effect on the protection of (minority)
shareholders. The data was split up into 2 periods:
1. before the first Dutch corporate governance code came into force (2003);
2. after the code Frijns came into force (2009).
I investigated whether the amount of RPTs has decreased over time. Besides this, I
investigated whether or not disclosure quality has increased over time. This was investigated
by running dependent means T-tests. The results of those t-tests are shown below:
Figure 25: Paired samples statistics
Figure 26: Paired samples correlations
Figure 27: Paired samples t-test
My hypotheses were one-tailed (I expected a significant decrease of the amount of RPTs
and a significant increase of the disclosure level). However, the mean of the amount of RPTs
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has increased over time. Though, this increase is not significant; the two-tailed significance
value is 0.194, so the one-tailed value is 0.097. This value is greater than 0.05, so the
increase of the amount of RPTs is not significant. The mean of disclosure quality has also
increased over time. This increase is also not significant; the two-tailed significance value is
0.399, so the one-tailed value is 0.170. This value is again greater than 0.05, so the increase
of disclosure quality is also not significant. So, hypothesis 10 as well as hypothesis 11 could
not be accepted (the null hypotheses could not be rejected).
Subsequently, the effectiveness of the code was tested by comparing the coefficient of the
explanatory variables amount of RPTs and Disclosure level in the different periods. I
investigated whether or not the amount of RPTs (still) have a significant negative effect on
firm value after the updated version (Code Frijns) came into effect and whether or not the
negative effect diminished over time. This diminishing effect may indicate that the corporate
governance code resulted in an increase of investor protection; the explanatory power of
RPTs (and thus risk of expropriation) decreased over time, so shareholders experienced
RPTs less negative over time.
However, the coefficient of the amount of RPTs slightly increased over time (comparison of
the coefficients of the amount of RPTs, as reflected in Figure 19: Multiple regression Part I
output 2003 and Figure 20: Multiple regression Part I output 2009). The difference is not
significant, since the coefficient of 2009 lies within the range17 of the coefficient of 2003.
Besides this, the coefficient is in both years positive, which indicates that the amount of
RPTs had a positive effect on firm value. Both results are not in line with my expectations.
Since hypothesis 12 assumes a diminishing negative effect, this hypothesis could not be
accepted.
Besides this, I explored whether or not the disclosure level (still) has a significant positive
effect on firm value (a mitigating effect of the negative effect of the amount of RPTs on firm
value) after the Code Frijns came into force. I expected this effect increased over time, since
I expected disclosure quality increased, which strengthened the mitigating effect of
disclosure quality. In 2003, the coefficient of DL was -0.241, which means that disclosure
quality had a negative effect on firm value. In 2009, the coefficient of DL 0.1419, which
means that disclosure quality had a positive effect on firm value. So, the positive effect had
increased over time (changed from negative to positive). However, this change was not
17
(coefficient -2*standard error till coefficient + 2*standard error)
85
significant, since the coefficient of 2009 lies within the range18 of the coefficient of 2003.
Therefore, hypothesis 13 could not be accepted.
6.8 Limitations
The conducted research has several limitations. First of all, the sample of my research was
small; the sample consisted of only 98 firms for each examined year. The small sample was
caused by the fact that most of the data had to be gathered manually. Due to the small
sample, the results of this research are less reliable.
Secondly, most corporate governance and ownership data was collected from the annual
reports as released by the firms of my sample. Some reports did not contain all information
elements which were necessary for my research. An assumption was made that missing
values, like not mentioning a separate audit committee, or not mentioning whether the audit
committee consisted of some financial expert(s), implied that there was no audit committee
respectively financial expert at all. However, this assumption is quite rigorous, since it could
be the case a firm did have an audit committee as well as some financial expert(s), but did
not mention it in their annual report. So, the assumption made may be incorrect.
Furthermore, the risk of expropriation is measured in this research by the total amount of
RPTs in which a company entered in the concerning year. However, the amount of RPTs
may depend on the type of industry. Though, this is not taken into account (for example as
control variable).
Another limitation of this research is the way in which the voting power of the main
shareholder was measured. For almost all firms, only the percentage of ordinary shares of
the main shareholder was available, so this was used to determine the voting power of the
main shareholder. However, it may be better to use the percentage of voting rights of the
main shareholder or the difference between the percentages of voting rights and cash flow
rights, since this is a better proxy for the risk of expropriation by the main shareholder.
Finally, in this research, the years 2003 and 2009 were compared in order to investigate the
difference in shareholder protection level. Those years were chosen in view of the
introduction of the Dutch corporate governance code (Tabaksblat) in 2004 and the revised
version (Frijns) in 2009; the year 2003 represents the last year before the code Tabaksblat
came into force and 2009 was the first year under the code Frijns. However, in 2003, there
18
(coefficient -2*standard error till coefficient + 2*standard error)
86
probably were some ‘early adapters’ which voluntary report in accordance with the code
Tabaksblat before it officially came into force. So, the choice of the year 2003 is probably not
purely accurate.
6.9 Summary
This chapter showed and analysed the results of the conducted research. First of all, a
description of the variables and the data was given for the year 2003 as well as 2009,
including the results of the conducted disclosure study.
In section four, the results of the first part of my research were analysed; this part
investigated the relation between the amount of RPTs, disclosure level in de field of RPTs
and firm value for the years 2003 and 2009. In both years, no significant negative
respectively positive relation was found between the amount of RPTs, disclosure level and
firm value. Those results are not in line with the results of Nekhili and Cherif (2011).
Thereafter, the results of the second part of my research were shown and analysed. This
part was devoted to the investigation of the relation of some corporate governance- and
ownership characteristics and the amount of RPTs. For the year 2009, a significant positive
relation was found between the percentage of ordinary shares of the main shareholder and
the amount of RPTs. This result is more or less in line with one of the results of Nekhili and
Cherif (2011); they found a significant positive relation between the percentage of voting
rights of the main shareholder and the number of RPTs. For all other characteristics like
being audited by a big 4 auditor, being second listed in the USA, the number of executive
and supervisory board members and the level of expertise of the audit committee, no
significant impact was found. Those other results are not in line with the results of Nekhili and
Cherif (2011).
After that, the results of the panel data regressions were shown and analysed. A significant
positive relation was found between being second listed in the USA, however, this was the
reverse of the expected effect, so none of the hypotheses could be accepted. Though, this
result is more or less in line with the study of Nekhili and Cherif (2011); they also found a
significant positive relation between being second listed in the USA and the number of RPTs.
In the subsequent section, the results of the third part of my research were analysed. This
part compared the results of 2003 with the results of 2009 in order to investigate whether the
shareholder protection has increased over the years. No significant difference in mean of the
amount of RPTs and disclosure level was found between the year 2003 and 2009, so
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hypotheses 10 and 11 could not be accepted. Also no significant difference of the
coefficients of the amount of RPTs and disclosure level was found between 2003 and 2009.
So, hypotheses 12 and 13 could also not be accepted.
Finally, in section eight, the limitations of this research were pointed out. The main limitation
was the sample of my research; since the sample was small, due to the time-consuming
nature of the collection of my data, the results of my research are less reliable. Furthermore,
some assumptions are made by the collection of the data; missing information in the annual
reports about the audit committee or financial expert implies the firm does not have any.
Those assumptions are quite rigorous. Measuring voting power of the main shareholder by
the percentage of ordinary shares and the choice of the year 2003 as pre corporate
governance code year are also not totally accurate. Finally, the amount of RPTs is not
controlled by the type of industry, which is possibly affecting the amount of RPTs.
88
7. Conclusion
This thesis was devoted to RPTs. Since RPTs are associated with the risk of expropriation of
firms’ resources, entering into RPTs should have a negative effect on firm value. In this
thesis, I investigated this negative relation, as well as some related variables. Those
variables included disclosure level; a high disclosure quality may mitigate the expected
negative effect of RPTs on firm value. Furthermore, the relation between RPTs and some
corporate governance- and ownership characteristics was investigated. The central research
question of this thesis was:
“Is there a relation between the amount of RPTs and firm value and which firm
characteristics affect the amount of RPTs?”
The conducted empirical research was split up in three parts. In the first part, the relation
between the amount of RPTs, disclosure level in the field of RPTs and firm value was
investigated. I expected a negative relation between the amount of RPTs and firm value,
since I used the amount of RPTs as a proxy for the risk of expropriation. However, no
significant relation was found between the amount of RPTs and firm value for the year 2003
as well as 2009. This conclusion is in contrast with earlier studies as conducted by Cheung
et al. (2006), Kohlbeck and Mayhew (2010) and Nekhili and Cherif (2011). They all found a
significant negative relation between RPTs (measured by the amount or number of RPTs)
and firm value.
This part of the research also investigated the relation between disclosure level in the field of
RPTs and firm value. This disclosure level was determined by conducting a disclosure index
study. For all firms, I determined a disclosure ratio (number of the predefined information
elements the disclosure contained divided by the total number of disclosure elements (11
elements)). The underlying assumption was that a higher disclosure amount indicates a
higher disclosure quality. After the disclosure ratio was determined, I investigated the relation
between this disclosure ratio and firm value. I expected a positive relation between those
variables, since I expect that giving more information could have a mitigating effect on the
negative effect of RPTs on firm value. So, the disclosure ratio should have a positive effect
on firm value. However, I did not find a significant negative relation between the disclosure
level and firm value for the year 2003 as well as 2009. This is in contrast with the study of
Cheung et al. (2006) and Ge et al. (2010). Cheung et al (2006) found that a low disclosure
level had a significant negative impact on MAAR. Ge et al (2010) found that investors did not
devaluate earnings after the introduction of new fair value measurement legislation in the
field of RPTs. However, this research is perhaps not comparable with my research, since the
89
research of Ge et al. (2010) did not contain a separate variable for disclosure quality, but
only the RPT variable. Furthermore, Ge et al. (2010) used earnings as dependent variable.
However, it might be assumable that the higher disclosure quality due to the new legislation
mitigates the negative effect of RPTs on earnings and thus firm value. So, in case it is
assumed that the two variables of my research (RPTs and Disclosure level) are included in
one variable in the research of Ge et al. (2010), and firm value and earnings are substitutes,
the results of my research are not in line with the results of this latter study.
In the second part of my research, I investigated the relation between the amount of RPTs
and some corporate governance and ownership characteristics. Of those characteristics, I
expected that the number of executive board members and percentage of ordinary shares of
the main shareholder should have a positive effect on the amount of RPTs. I expected that
the number of supervisory board members, the ratio of supervisory board members and total
board members, the level of expertise of the audit committee, being listed in the USA and
being audited by a big 4 audit firm should have negative effect on the amount of RPTs.
However, I found no single significant relation for the year 2003. For the year 2009, I found a
significant positive relation between the percentage of ordinary shares of the main
shareholder and the amount of RPTs. This is (approximately) in line with the research of
Nekhili and Cherif (2011), who proved a positive relation between the voting rights of the
main shareholder and the number of RPTs. However, I did not find other significant results,
which is not in line with their research.
The data was also analysed by using a panel data regression. Again, no significant relation
was found between the amount of RPTs, disclosure level and firm value. A significant
positive relation was found between being listed in the USA and the amount of RPTs. This
positive effect was the reverse of the expected effect. However, this positive relation is in line
with the research of Nekhili and Cherif, who also found a positive relation between being
listed in the USA and the number of RPTs.
Subsequently, I investigated whether the amount of RPTs has decreased over time. I
expected a decrease, since I expected that the Dutch corporate governance code increased
the investor protection in the Netherlands. A higher investor protection should result in a
smaller amount of RPTs, since the amount of RPTs was a proxy for the risk of expropriation.
However, I did not found a significant decrease of the amount of RPTs, the amount of RPTs
actually increased. However, this increase was not significant.
I also investigated whether the disclosure level has increased over time. I expected an
90
increase, since the Dutch corporate governance code should increase the transparency of
firms. The disclosure level did increase over time. However, this increase was not significant.
Finally, I investigated whether the negative effect of the amount of RPTs on firm value
diminished over time by comparing the coefficients of both years. However, both coefficients
were (not significantly) positive, so there was no negative effect at all. The coefficient had
actually increased over time. However, this increase was not significant. Furthermore, I
investigated whether the positive effect of disclosure level on firm value increased over time
by again comparing those coefficients of both years. The coefficient of disclosure level
changed from negative to positive over time, so, the positive effect increased. However, this
increase was not significant.
Therefore, it can be concluded that no negative relation between the amount of RPTs and
firm value is found. The percentage of ordinary shares of the main shareholder did have a
positive effect on the amount of RPTs. Being listed in the USA had also a positive effect on
the amount of RPTs.
91
8. Further research
Since the execution and the final results of a research always raise new questions, this
chapter contains some suggestions for further research.
First of all, this research could be repeated with a larger sample; more time is needed due to
the time-consuming data collection process. It may be possible to execute the data collection
by more persons.
Secondly, it could be interesting to cover more years in the sample. My research only
covered the years 2003 and 2009, again due to the time-consuming data collection process.
It could be interesting to include some years before 2003 in the sample, to solve the ‘early
adopters problem’ as mentioned in section 6.8 Limitations. Also the inclusion of the year
2004 may be interesting, since this was the first official year any Dutch corporate governance
code was into force. Generally speaking, to give a better overview of the progress over time,
more years should be included in the research.
In this research, the absolute amounts of all kind of RPTs were summed to one total amount
of RPTs per firm. It may also be an interesting option to split the amount of RPTs variable by
type of transaction. The studies of Gordon and Henry (2005), Kohlbeck and Mayhew (2010)
and Nekhili and Cherif (2011) already made a separation per type of transaction (for example
direct / indirect transactions or transactions with management / supervisory board / affiliated
companies). In case a separation is made, it is possible to investigate which specific kind of
transactions are harmful (have a significant negative effect on firm value). Furthermore, the
effect of the corporate governance and ownership characteristics could be tested per type of
RPT.
Another suggestion is in the field of the collection of corporate governance- and ownership
characteristics data. To gather more accurate data, it may be an idea to collect this data
using questionnaires. This is perhaps more accurate, since I used some rigorous
assumptions in my data collection process, as mentioned in 6.8 Limitations (not mentioning
in the annual report implies the firm does not have any).
Finally, there are some characteristics which may be worth to be included in further research.
Those characteristics are not included in the current research due to the lack of information.
This involves the following variables: voting power of the main shareholder, separation of
cash flow rights and ownership rights of the main shareholder and group loans. Those
92
variables were integrated in the research of Nekhili and Cherif (2011) and Claessens et al.
(1999). More voting rights compared to cash flow rights of the main shareholder or voting
power of the main shareholder in general may lead to higher risk of expropriation of the
minority shareholder; the main shareholder might try to increase his yield by entering into
RPTs with the firm. As a result, the main shareholder gathered more than his fair share
(based on cash flow rights) at the cost of the minority shareholder. Group loans (group
financing) can also be used to expropriate the firms’ resources. By using loans, resources
could be shifted within the group. This could harm the reporting firm, for example in case the
receiver of the loan does not repay his loan. This can be a normal creditors’ risk, but in case
the loan is not based on arm’s length conditions, group loans can be used to expropriate the
firms’ resources to the benefit of the related party. Examples of non-arm’s length conditions
are agreeing with a low interest percentage or providing a loan to a non-creditworthiness
receiver. So, group loans as well as a great difference between voting rights and cash flow
rights or voting power of the main shareholder may indicate a risk of expropriation. It could
be interesting to integrate those variables in further research.
93
9. References
9.1 Articles & books
AICPA. (1994). Improving business reporting- A customer focus: Meeting the information
needs of investors and creditors, comprehensive report of the special committee on Financial
reporting (the Jenkins report). New York, NY: American Institute for Certified Public
Accountants.
Backhuijs, J.B. & Braam, R.J.M. (2008). Verbonden partijen en bestuurdersbeloningen. In:
R.G. Bosman, R.L. ter Hoeven, R.G.A. Vergoossen, Het jaar 2007 verslagen: onderzoek
jaarverslaggeving ondernemingen, Kluwer: Deventer: 35-53.
Bakker, L. & Vergoossen, R. (2004). US GAAP en de jaarrekening van Nederlandse
ondernemingen. Maandblad voor Accountancy en Bedrijfseconomie, 78(11): 489-496.
Beattie, V., McInnes, B. & Fearnley, S. (2004). A methodology for analysing and evaluating
narratives in annual reports: a comprehensive descriptive profile and metrics for disclosure
quality attributes. Accounting Forum, 28(3): 205-236.
Bos, A. de, Lückerath-Rovers, M. & Zijl, N. van. (2008). Zorg over onafhankelijkheid in onetier board terecht of niet?. Goed Bestuur, 1: 12-21.
Botosan, C.A. (2006). Dislosure and the cost of capital: what do we know? Accounting and
Business Research, 36(1): 31-40.
Chen, J.J., Cheng, P. & Xiao, X. (2011). Related party transactions as a source of earnings
management. Applied Financial Economics, 21(3): 165-181.
Cheung, Y-L., Raghavendra Rau, P. & Stouraitis, A. (2006). Tunneling, propping, and
expropriation: evidence from connected party transactions in Hong Kong. Journal of
Financial Economics, 82(2): 243-286.
Claessens, S., Djankov, S., Fan, J. & Lang, L. (1999). Expropriation of Minority
Shareholders: Evidence from East Asia. Working paper, available at SSRN:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=620647.
94
Dahya, J., Dimitrov, O., & McConnell, J.J. (2008). Dominant shareholders, corporate boards,
and corporate value: A cross-country analysis. Journal of Financial Economics, 87(1): 73100.
DeAngelo, L. E. (1981). Auditor Size and Audit Quality. Journal of Accounting and
Economics, 3(3): 183-199.
DeFond, M.L., Hann, R.N. & Hu, X. (2005). Does the Market Value Financial Expertise on
Audit Committees of Boards of Directors? Journal of Accounting Research, 43(2): 153-193.
DeJong, J., Jong, A. de., Mertens, G.M.H. & Wasley, C.E. (2001). Corporate governance in
Nederland: de invloed van de Commissie Peters. Maandblad voor Accountancy en
Bedrijfseconomie, 75(4): 150-160.
Djankov, S., La Porta, R., Lopez-de-Silanes, F. & Shleifer, A. (2008). The law and economics
of self-dealing. Journal of Financial Economics, 88(3): 430–465.
Doidge, C., Karolyi, G.A. & Stulz, R.M. (2004). Why are foreign firms listed in the U.S. worth
more?. Journal of Financial Economics, 71(2): 205-238.
Faccio, M., Lang, L.H.P. & Young, L. (2003). Debt and Expropriation. Working paper.
Available at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=239724.
Fitzgerald, M.L., Vivero, F., & Reyes, P. (2009). Securities registration. Insights, 23(4): 11-15.
Ge, W., Drury, D.H., Fortin, S., Liu, F. & Tsang, D. (2010). Value relevance of disclosed
related party transactions. Advances in Accounting, incorporating Advances in International
Accounting, 26(1): 134–141.
Gorden, E. A. & Henry, E. (2005). Related party transactions and earnings management.
Working paper. Available at SSRN: http://ssrn.com/abstract=612234.
Jensen, M.C. & Meckling, W. (1976). Theory of firm: managerial behavior, agency costs and
ownership structure. Journal of financial economics, 3(4): 305-360.
95
Jungmann, C. (2007). The Effectiveness of Corporate Governance in One-Tier and Two-Tier
Board Systems - Evidence from the UK and Germany-. European Company and Financial
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Krishnan, J. & Lee, J. E. (2009). Audit Committee Financial Expertise, Litigation Risk, and
Corporate Governance. Auditing: A Journal of Practice and Theory, 28(1): 241-261.
Kohlbeck, M., & Mayhew, B.W. (2010). Valuation of firms that disclose related party
transactions. Journal of Accounting and Public Policy, 29(2): 115-137.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A. & Vishny, R.W. (1997). Legal determinants of
external finance. The Journal of Finance, 52(3): 1131-1150.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A. & Vishny, R.W. (1998). Law and Finance,
Journal of Political Economy; 106(6): 1113-1155.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A. & Vishny, R.W. (2000). Investor protection
and corporate governance. Journal of Financial Economics, 58(1): 3-27.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A. & Vishny, R.W. (2002). Investor protection
and corporate valuation. The Journal of Finance, 57(3): 1147-1170.
Linden, S. van der. (2009). RJ 330 (2001) versus IAS 24. Spotlight, 2009, 1: 19-22.
Moerland, P.W. (2001). Het SER-advies inzake structuurregeling. Maandblad voor
Accountancy en Bedrijfseconomie, 75(7/8): 292-298.
Nekhili, M. & Cherif, M. (2011). Related parties transactions and firm’s market value: the
French case. Review of Accounting and Finance, 10(3): 291-315.
Peij, S.C. (2010). De 'one-tier board: waarom wel en niet?, Kluwer Management Executive,
January/February 2010, 1-7 Available at: www.kluwermanagement.nl article code 0171).
Reese, W.A. & Weisbach, M.S. (2002). Protection of minority shareholder interests, crosslistings in the United States, and subsequent equity offerings. Journal of Financial
Economics, 66(1): 65-104.
96
Schoenmaker, J. (2007). De dilemma’s van de commissaris. Management Scope, 19
December 2007: 48-50.
Tas, L. van der. (2007). Hoe principieel is IFRS?. Maandblad voor Accountancy en
Bedrijfseconomie, 81(12): 586-593.
Verbeek, M. (2011). Quantitative Methods in Applied Economics: Panel Data. 12 September
2011, Rotterdam School of Management, Erasmus University Rotterdam.
Wielaard, N. (2009). Wat iedere accountant zou moeten weten over Code Frijns. De
Accountant, December 2009: 36-37.
9.2 Websites
www.europa.eu (consulted on June 5th 2012)
www.oecd.org (consulted on June 22th 2012)
http://dss.princeton.edu/online_help/stats_packages/stata/panel.htm#choice (consulted on
January 4th 2013)
9.3 Regulation
Commissie Corporate Governance. (2003). De Nederlandse corporate governance code
(code Tabaksblat) 9 december 2003, 1-70.
Monitoring Commissie Corporate Governance Code. (2009). De nederlandse corporate
governance code. Beginselen Van Deugdelijk Ondernemingsbestuur En Best Practice
Bepalingen, 1-60.
Raad voor de Jaarverslaggeving (2003). Richtlijnen voor de jaarverslaggeving – Jaareditie
2003, Kluwer: Deventer: 859-865.
Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July
2002.
Securities and Exchange Commission (SEC). (2003). Final rule: Disclosure Required by
Sections
406
and
407
of
the
Sarbanes-Oxley
Act
of
2002.
Available
at:
http://www.sec.gov/rules/final/33-8177.htm.
97
Royal Decree of October 4th 2012, Staatsblad van het Koninkrijk der Nederlanden, Jaargang
2012, 455.
TK (2008-2009), Memorie van Toelichting Wijziging van boek 2 van het Burgerlijk Wetboek in
verband met de aanpassing van regels over bestuur en toezicht in naamloze en besloten
vennootschappen, Tweede Kamer, vergaderjaar 2008-2009, 31 763, nr. 3.
IFRS Foundation. International Accounting Standard 24 Related Party Disclosures. (Effective
since January 2011) Available at: http://www.ifrs.org/IFRSs/IAS.htm (consulted on July 23th
2012).
98
10. Appendices
10.1 Search terms
English:
Dutch:

Executive

Bestuur

Management

Directie

Supervisory

Commissaris

Audit (committee

Audit commissie)

Expert

Expert

Related parties

Verbonden partijen

Transaction

Transactie

Relationship

Relatie

Provision

Voorziening

Security

Zekerheidsstelling

Secured

Zekerheden

Tax (risk)

Belasting (risico)

Transfer price

Transfer price / Verrekenprijzen

Arms´ length

Arm´s length/ Zakelijk

Market price

marktprijs

(Major) shareholder

aandeelhouder

Large shareholder

Significant shareholder

Belangrijke aandeelhouder

Major holdings

Vote

Stem

Dutch Major Holdings Disclosure

Wet melding zeggenschap
Act

Dutch Financial Supervision Act

Listed companies disclosure act

Beurs

Stock Exchange

Beursgenoteerd

Listing
99
10.2 Composition of final sample
Figure 28: List of all firms included in the sample
#
Company name
ISIN
Disclosure level
ratio 2003
Disclosure level
ratio 2009
1 ING GROEP NV
KONINKLIJKE PHILIPS ELECTRONICS
2
NV
3 KONINKLIJKE KPN NV
NL0000303600
0,27
0,55
NL0000009538
0,36
0,36
NL0000009082
0,36
0,27
4 UNILEVER NV
NL0000009355
0,18
0,45
5 VAN LANSCHOT NV
NL0000302636
0,64
6 HEINEKEN HOLDING NV
NL0000009165
0,27
7 HEINEKEN NV
NL0000008977
0,27
8 AKZO NOBEL NV
NL0000009132
0,73
9 KONINKLIJKE AHOLD NV
NL0006033250
0,64
0,45
0,45
0,27
10 KONINKLIJKE DSM N.V.
NL0000009827
11 POSTNL N.V.
NL0009739416
12 KONINKLIJKE BAM GROEP NV
NL0000337319
0,36
13 RANDSTAD HOLDING NV
NL0000379121
0,36
14 KAS BANK NV
NL0000362648
15 CORIO N.V.
NL0000288967
16 WOLTERS KLUWER NV
NL0000395903
17 HAL TRUST N.V.
BMG455841020
18 ROBECO NV
NL0000289783
0,18
19 ASML HOLDING N.V.
NL0006034001
0,45
20 SBM OFFSHORE N.V.
NL0000360618
0,36
21 KONINKLIJKE VOPAK N.V.
KONINKLIJKE BOSKALIS
22
WESTMINSTER NV
23 BNP PARIBAS OBAM N.V.
NL0009432491
0,36
NL0000852580
0,36
24 ROYAL IMTECH N.V.
NL0006055329
25 FUGRO NV
NL0000352565
26 HOMBURG INVEST INC
CA4368714040
27 EUROCOMMERCIAL PROPERTIES N.V.
NL0000288876
28 NUTRECO N.V.
NL0000375400
29 CSM NV
NL0000852549
30 VASTNED RETAIL NV
NL0000288918
31 HEIJMANS NV
NL0009269109
32 HUNTER DOUGLAS N.V.
ANN4327C1220
33 USG PEOPLE N.V.
NL0000354488
34 DRAKA HOLDING N.V.
NL0000347813
0,27
35 AALBERTS INDUSTRIES NV
NL0000852564
0,18
36 NIEUWE STEEN INVESTMENTS NV
NL0000292324
37 ARCADIS NV
NL0006237562
0,55
38 SMIT INTERNATIONALE NV
NL0000383800
0,27
39 MEDIQ NV.
NL0009103530
0,27
40 REED ELSEVIER NV
NL0006144495
0,27
0,27
0,55
0,18
0,18
NL0006294035
0,18
0,45
0,45
0,45
0,27
0,18
0,55
0,45
100
41 BALLAST NEDAM N.V.
NL0000336543
42 CRUCELL N.V.
NL0000358562
43 ASM INTERNATIONAL NV
NL0000334118
44 SLIGRO FOOD GROUP N.V.
NL0000817179
0,64
45 TELEGRAAF MEDIA GROEP N.V.
NL0000386605
0,55
46 ROYAL TEN CATE NV
NL0000375749
47 ROLINCO N.V.
NL0000289817
48 TKH GROUP N.V.
NL0000852523
0,18
49 KONINKLIJKE WESSANEN NV
NL0000395317
0,27
50 MACINTOSH RETAIL GROUP NV
NL0000367993
51 TRIODOS GROENFONDS N.V.
NL0000440204
52 GAMMA HOLDING NV
NL0000355824
53 STERN GROEP NV
NL0000336303
54 UNIT4 N.V.
NL0000389096
55 ORDINA NV
NL0000440584
56 ACCELL GROUP NV
NL0009767532
0,45
57 XEIKON N.V.
NL0006007247
0,64
58 BE SEMICONDUCTOR INDUSTRIES NV
NL0000339760
59 ORANJEWOUD N.V.
NL0000370419
0,18
0,64
0,73
0,36
0,27
0,18
0,18
0,45
0,18
0,45
0,27
60 KEMPEN ORANJE PARTICIPATIES N.V. NL0000440675
61 ROTO SMEETS GROUP N.V.
NL0009169515
0,45
0,55
0,27
62 BRUNEL INTERNATIONAL NV
NL0000343432
0,73
0,45
63 DIM VASTGOED NV
NL0000284750
0,45
0,73
64 EXACT HOLDING NV
NL0000350361
0,55
65 KENDRION N.V.
NL0000852531
0,18
66 BEVER HOLDING NV
NL0000285278
0,64
67 AFC AJAX NV
NL0000018034
68 KONINKLIJKE REESINK N.V.
NL0000379303
69 H.E.S. BEHEER NV
NL0000358125
70 BETER BED HOLDING NV
71 NEDERLANDSCHE
APPARATENFABRIEK 'NEDAP' N.V.
72 QURIUS N.V.
NEWAYS ELECTRONICS
73
INTERNATIONAL NV
74 KEMPEN ORANGE FUND N.V.
NL0000339703
75 BATENBURG TECHNIEK N.V.
NL0006292906
76 AMSTERDAM COMMODITIES N.V.
NL0000313286
77 SIMAC TECHNIEK NV
NL0000441616
0,27
78 FORNIX BIOSCIENCES NV
NL0000439990
0,36
79 ICT AUTOMATISERING NV
NL0000359537
80 PHARMING GROUP NV
NL0000377018
81 DOCDATA NV
NL0000345627
82 C/TAC NV
NL0000345577
83 HOLLAND COLOURS NV
NL0000440311
84 KONINKLIJKE BRILL NV
NL0000442523
85 DPA GROUP N.V.
NL0009197771
NL0000371243
0,36
0,18
NL0000368140
NL0000440618
0,27
0,09
0,18
NL0000289627
0,64
0,27
0,55
0,36
0,45
0,45
0,18
0,55
0,36
101
86 INSINGER DE BEAUFORT EUROPEAN
MID CAP FUND N.V.
87 HITT NV
88 HYDRATEC INDUSTRIES N.V.
NL0009787894
0,27
NL0000358158
0,27
0,09
NL0009391242
89 AND INTERNATIONAL PUBLISHERS NV NL0000430106
90 N.V. KONINKLIJKE DELFTSCH
AARDEWERKFABRIEK 'DE
NL0000378669
PORCELEYNE FLES ANNO 1653'
91 ROODMICROTEC N.V.
NL0000440477
92 NEDSENSE ENTERPRISES N.V.
NL0009312842
93 TIE HOLDING NV
NL0000386985
94 WITTE MOLEN N.V.
NL0009767540
95 VIVENDA MEDIA GROEP N.V.
NL0009312362
96 VALUE8 NV
NL0009082486
97 ANTONOV PLC
GB00B3SHND79
98 AAMIGOO GROUP N.V.
CWN001011006
99 NEW SOURCES ENERGY N.V.
NL0009822014
0,55
0,64
0,36
0,27
0,36
0,55
0,45
0,45
0,38
102
10.3 Results Hausman test
10.3.1 Hausman test panel data analysis research part I
Figure 29: Hausman test research part I
Since the Prob>chi2 ≠ <0.05, the random effects model is the appropriate model.
10.3.2 Hausman test panel data analysis research part II
Figure 30: Hausman test research part II
Since again the Prob>chi2 ≠ <0.05, the random effects model is the appropriate model.
103