Cash based related party transactions in new economy firms

Description
This paper aims to investigate associations between related party transactions (RPTs)
and governance and performance factors of new economy firms.

Accounting Research Journal
Cash-based related party transactions in new economy firms
Gerry Gallery Natalie Gallery Matthew Supranowicz
Article information:
To cite this document:
Gerry Gallery Natalie Gallery Matthew Supranowicz, (2008),"Cash-based related party transactions in new
economy firms", Accounting Research J ournal, Vol. 21 Iss 2 pp. 147 - 166
Permanent link to this document:http://dx.doi.org/10.1108/10309610810905935
Downloaded on: 24 January 2016, At: 21:06 (PT)
References: this document contains references to 39 other documents.
To copy this document: [email protected]
The fulltext of this document has been downloaded 728 times since 2008*
Users who downloaded this article also downloaded:
Emiliano Di Carlo, (2014),"Related party transactions and separation between control and direction in
business groups: the Italian case", Corporate Governance: The international journal of business in society,
Vol. 14 Iss 1 pp. 58-85http://dx.doi.org/10.1108/CG-02-2012-0005
Mehdi Nekhili, Moêz Cherif, (2011),"Related parties transactions and firm's market value: the French case",
Review of Accounting and Finance, Vol. 10 Iss 3 pp. 291-315http://dx.doi.org/10.1108/14757701111155806
Elizabeth A. Gordon, Elaine Henry, Darius Palia, (2004),"RELATED PARTY TRANSACTIONS AND
CORPORATE GOVERNANCE", Advances in Financial Economics, Vol. 9 pp. 1-27
Access to this document was granted through an Emerald subscription provided by emerald-srm:115632 []
For Authors
If you would like to write for this, or any other Emerald publication, then please use our Emerald for
Authors service information about how to choose which publication to write for and submission guidelines
are available for all. Please visit www.emeraldinsight.com/authors for more information.
About Emerald www.emeraldinsight.com
Emerald is a global publisher linking research and practice to the benefit of society. The company
manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as
providing an extensive range of online products and additional customer resources and services.
Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee
on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive
preservation.
*Related content and download information correct at time of download.
D
o
w
n
l
o
a
d
e
d

b
y

P
O
N
D
I
C
H
E
R
R
Y

U
N
I
V
E
R
S
I
T
Y

A
t

2
1
:
0
6

2
4

J
a
n
u
a
r
y

2
0
1
6

(
P
T
)
Cash-based related party
transactions in neweconomy ?rms
Gerry Gallery, Natalie Gallery and Matthew Supranowicz
School of Accountancy, Queensland University of Technology, Brisbane, Australia
Abstract
Purpose – This paper aims to investigate associations between related party transactions (RPTs)
and governance and performance factors of new economy ?rms.
Design/methodology/approach – Previous research has examined the RPTs of large US ?rms. In
contrast, the authors focus on smaller, newly listed Australian ?rms. Referred to as “commitments test
entities” (CTE), these ?rms are distinguished by the unique Australian Securities Exchange listing
requirements applying to them, and associated additional (quarterly cash ?ow) reporting
requirements.
Findings – While strong corporate governance characteristics may be expected to constrain the
amounts of payments and loans to related parties, we ?nd only weak evidence to support that
proposition. The results show that ?nancial condition dominates the decision to engage in RPTs and
suggest that external monitoring (associated both with larger ?rm size and the quarterly reporting
phase) are a more effective restraint on the magnitude of RPTs for these high-risk CTE ?rms.
Research limitations/implications – The ?ndings are generally consistent with the “con?ict of
interest view” proposed by Gordon et al. suggesting RPTs do not serve shareholders’ interests.
Practical implications – The ?ndings suggest that external monitoring may be a more effective
control over RPTs than internal corporate governance mechanisms in this institutional context of
small “cashbox” ?rms. Since RPTs may not be in the best interests of shareholders, extending
mandatory RPT disclosures to all periodic cash ?ow reports warrants further consideration by
regulators.
Originality/value – This study contributes to the limited research on the effects and implications of
RPTs.
Keywords Corporate governance, Cash ?ow, Australia
Paper type Research paper
1. Introduction
Global corporate scandals have focused regulators’ attention towards corporate
governance as a means of improving accountability. Related party transactions (RPTs)
have been linked to several of Australia’s largest corporate collapses (Institutional
Analysis, 2002) and have recently become subject to scrutiny as part of approaches
designed to improve governance standards. While accounting standards recognise that
RPTs may have the potential to distort ?nancial reports and should be properly
disclosed, they have generally regarded these transactions as “a normal feature of
commerce and business” (AASB, 2005, para. 5) and have not attempted to restrict or
discourage them. However, stringent corporate governance measures introduced in the
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1030-9616.htm
The authors thank the participants of research seminars at Bond University and University of
Western Sydney, and attendees at the 2008 AAA International Accounting Section meeting, for
their helpful comments and suggestions on earlier drafts of this paper. The authors also
gratefully acknowledge the Institute of Chartered Accountants in Australia for a research grant
that partly funded data collection for this study.
Cash-based
related party
transactions
147
Accounting Research Journal
Vol. 21 No. 2, 2008
pp. 147-166
qEmerald Group Publishing Limited
1030-9616
DOI 10.1108/10309610810905935
D
o
w
n
l
o
a
d
e
d

b
y

P
O
N
D
I
C
H
E
R
R
Y

U
N
I
V
E
R
S
I
T
Y

A
t

2
1
:
0
6

2
4

J
a
n
u
a
r
y

2
0
1
6

(
P
T
)
USA have now prohibited most related party loans (RPL) between companies and their
senior management.
Recent empirical studies in the USA have examined RPTs within large ?rms to
determine the nature and consequences of these transactions. Gordon et al. (2004b) and
Kohlbeck and Mayhew (2004) have found that RPTs are associated with weaker
corporate governance characteristics and poor market performance. They conclude
that RPTs are a con?ict of interest between management and shareholders rather than
ef?cient, value-adding transactions. While these studies have investigated RPTs
within large US ?rms, no known studies of RPTs have yet been conducted in Australia
or have examined smaller-sized ?rms.
The objective of this study is to investigate factors associated with RPTs within a
sample of smaller, newly listed companies in Australia. Referred to as “commitments
test entities” (CTEs), the ?rms examined are distinguished by the manner in which
they have listed on the Australian Securities Exchange (ASX) and the additional
reporting requirements they must adhere to. CTEs are generally “new economy” ?rms
with developing businesses (ASX, 2002) and are not required to have a history of
pro?tability. As a condition of their admission, the ASX requires them to provide the
market with quarterly cash ?ow (QCF) reports for at least the ?rst eight quarters after
listing. A unique feature of this quarterly report is the requirement to disclose cash
out?ows for related party payments (RPPs) and loans to directors and related entities.
Analysing these transactions within CTEs allows this study some important
distinctions from prior research and takes advantage of the unique prescribed format
disclosures made within the QCF report.
Using a large sample of quarterly reports that include the majority of CTEs that listed
between 2000 and 2005, we ?nd support for the “con?ict of interest view” proposed by
Gordon et al. (2004a), suggesting RPTs do not serve shareholders’ interests. Like Gordon
et al. (2004b) and Kohlbeck and Mayhew(2004) in relation to large US ?rms, we ?nd that
internal monitoring mechanisms in the form of independent directors constrain the
amounts of RPTs within CTEs. However, other well-accepted indicators of good
corporate governance used in prior research are not associated with RPTs. Instead,
external monitoring (associated both with larger ?rm size and the quarterly reporting
phase) appears to be a more effective restraint on the magnitude of RPTs within CTEs.
We also observe that a number of CTEperformance factors (includingreturn onassets –
ROA) are negatively associated with RPTs which further supports the con?ict interest
argument rather than the ef?cient transactions argument.
The remainder of this paper is organised as follows. Section 2 provides a background
on RPTs and reviews the prior literature. Section 3 describes CTEs and their reporting
requirements. In Section 4, the factors expected to be associated with RPTs are
discussed. The research design is described in Section 5, with results of statistical tests
and analyses presented in Section 6, followed by the conclusion in Section 7.
2. Related party transactions and prior research
AASB, 2005 Related Party Disclosures de?nes RPTs as “a transfer of resources,
services or obligations between related parties, regardless of whether a price is
charged” (para. 9). Related parties include shareholders, directors, key management
personnel, subsidiaries (and/or parent companies), and associates of these parties
(AASB, 2005, para. 9). Gordon et al. (2004a, pp. 1-2) identify that RPTs are commonly
ARJ
21,2
148
D
o
w
n
l
o
a
d
e
d

b
y

P
O
N
D
I
C
H
E
R
R
Y

U
N
I
V
E
R
S
I
T
Y

A
t

2
1
:
0
6

2
4

J
a
n
u
a
r
y

2
0
1
6

(
P
T
)
“complex business transactions between a ?rm and its own managers, directors,
principal owners or af?liates”.
Australian, US and international accounting standards require disclosure of RPTs
as part of periodic reporting.[1] These transactions are of primary concern because, by
their nature, they may not be conducted on an arm’s-length basis and may not be based
on normal commercial terms (AASB, 2005, para. 6). While RPTs may have the potential
to distort a ?rm’s reported ?nancial performance and position (and hence require closer
scrutiny), they are nevertheless “a normal feature of commerce and business” as ?rms
conduct business through subsidiaries, joint ventures and associates (AASB, 2005,
para. 5). In addition to the disclosure requirements of accounting standards, RPTs have
now become subject of closer regulatory scrutiny.
In response to several large corporate collapses, the USA adopted prescriptive
corporate governance rules with the introduction of the Sarbanes-Oxley Act of 2002.
Despite being credited with quickly improving corporate governance standards in the
USA (Chhaochharia and Grinstein, 2007)[2], this rules-based approach has been
heavily criticised for the haste in which it was introduced and the high-compliance
costs it has imposed upon companies, particularly those that are smaller or developing
(Romano, 2004; Chhaochharia and Grinstein, 2007; Linck et al., 2006).
Australia has taken a different approach to improving governance, developing a
“best practice” framework rather than detailed rules (Hamilton, 2004, p. 4). The ASX
introduced the “Principles of Good Corporate Governance” in 2003, addressing issues
such as board structure, ?nancial reporting, ethics and remuneration policies. Although
it is not mandatory for Australian listed entities to comply with these principles, they
must provide reasons for any departure (ASXListing Rule 4.10.3). The ?exibility of this
approach is favoured by market participants and supported by the OECD (Hamilton,
2004).
The corporate governance regimes in Australia and the USA differ on the subject of
RPTs. The Sarbanes-Oxley legislation now prohibits most RPL to executives and
directors in the USA, while in Australia there is no equivalent guidance. In fact, there is
no reference to RPTs in the ASX Principles of Good Corporate Governance. The US
regulatory approach implies that RPTs (particularly, those involving loans to
management) are not in shareholders’ best interests and, therefore, should be prohibited.
Empirical studies in the USA generally support the contention that RPTs con?ict
with shareholders’ interests. Gordon et al. (2004b) analysed the RPTs of 112 public
companies in the USA in 2000 and 2001 (prior to the introduction of Sarbanes-Oxley).
They propose two alternative perspectives on the nature and effects of RPTs:
(1) they are a con?ict of interest between management and shareholders (and hence
increase agency costs); and
(2) RPTs are ef?cient transactions that ful?l a ?rm’s economic needs.
Gordon et al. (2004b) ?nd that RPTs are widespread, but are less common in ?rms with
stronger corporate governance characteristics. They also identify a negative relation
between ?rms’ market performance and the number and magnitude of RPTs. This
association is particularly strong in the case of RPL, lending support to the
Sarbanes-Oxley prohibition. Overall, they conclude that the con?ict of interest
hypothesis holds and that RPTs generally, and loans to executives in particular,
represent a con?ict of interest that are detrimental to shareholders’ interests.
Cash-based
related party
transactions
149
D
o
w
n
l
o
a
d
e
d

b
y

P
O
N
D
I
C
H
E
R
R
Y

U
N
I
V
E
R
S
I
T
Y

A
t

2
1
:
0
6

2
4

J
a
n
u
a
r
y

2
0
1
6

(
P
T
)
Similar to Gordon et al. (2004b) and Kohlbeck and Mayhew (2004) examined
whether the RPTs of 1,261 US companies in the S&P 1,500 Index are an agency cost, or
a method of ef?cient contracting. They also ?nd that RPTs are associated with a lower
returns on assets and weaker corporate governance. Moreover, where cash-based
remuneration of directors and executives is low (for example, where share options are
issued in place of higher cash salaries), RPL are more frequent. RPL may therefore be
used as a substitute form of compensation for less liquid remuneration. Kohlbeck and
Mayhew (2004, p. 6) show that RPTs “are more likely to occur when management has
the ability and the incentives to engage in them” and hence, impose agency costs on
shareholders.
3. Related party disclosures in CTE QCF reports
The limited prior research on RPTs has focused on the impact of RPTs on large
companies in the USA. This study builds on that literature by analysing such
transactions with respect to a subset of smaller, newly-listed companies in Australia
where the potential for value-destroying RPTs is greater than for most other listed
entities. Referred to as CTEs, these ?rms are distinguished from other ASX-listed
companies by different admission rules under which they listed, and additional special
reporting requirements.
In 1999, the ASX relaxed its admission rules[3] to allow entities holding more than
?fty per cent of their tangible assets in cash (or equivalents) to list, providing they
make “commitments” to eventually reduce this proportion to less than half. This
concession “facilitated the admission of smaller entities with developing businesses
based on new technology or other intellectual property assets” (ASX, 2002, p. 2). The
general pro?tability requirement which applies to other entities previously prevented
many of these ?rms from listing (Fargher and Woo, 2002). The ASX draws parallels
between such new and emerging companies to mining exploration companies (ASX,
2002), presumably because of higher risks and governance concerns associated with
CTEs (Gallery et al., 2004). Unlike the USA and the UK, Australia does not have a
separate exchange for smaller, developing companies.[4] Nor does the ASX distinguish
CTEs from all other listed entities by separate categorisation, or other means of clearly
“?agging” they are entities that were admitted under “special” rules and are subject to
additional ASX reporting requirements.
Klein and Mohanram (2005) show that ?rms entering the market via less stringent
NASDAQ listing rules (particularly when a history of pro?tability is not required) are
generally poor-performing and more risky. Parallels can be drawn between the
changes to the NASDAQ listing rules in the USA in the late 1990s and amendments
made to the ASX listing rules to admit CTEs. Both, the NASDAQ and the ASX
experienced a surge in new listings coinciding with the “dot-com boom” and the
changes made to their admission rules. A signi?cant proportion of these companies
would not have been permitted to list under the earlier, more conservative rules
(Fargher and Woo, 2002; Klein and Mohanram, 2005).
As a condition of their admission, CTEs are required to provide QCF reports to the
ASX for at least the ?rst eight quarters after listing (ASX Listing Rule 4.7B). This
additional reporting requirement was introduced because established periodic
reporting is considered to be insuf?ciently frequent to meet the market’s
information needs (ASX, 2002) and it is intended to mitigate the increased risks to
ARJ
21,2
150
D
o
w
n
l
o
a
d
e
d

b
y

P
O
N
D
I
C
H
E
R
R
Y

U
N
I
V
E
R
S
I
T
Y

A
t

2
1
:
0
6

2
4

J
a
n
u
a
r
y

2
0
1
6

(
P
T
)
investors exposed to these entities. Apart from mining exploration companies, CTEs
are the only entities in Australia that must provide any form of quarterly reports as
part of their routine periodic reporting regime.
The format of QCF reports is prescribed by Appendix 4C of the ASX Listing Rules,
and comprises a pro-forma cash ?ow statement with some limited “note” disclosures.
This report, which is not required to be audited or reviewed by the auditor, must be
lodged within one month of the end of the relevant quarter. CTEs must continue to
lodge QCF reports until the ASX (2002) determines that they have reached “suf?cient
maturity”, which is usually signalled by four consecutive quarters of positive cash
?ows from operations.
The content of the 4C QCF report differs in a number of ways from the requirements
of AASB, 2007 Cash Flow Statements[5], which prescribes the content of cash ?ow
statements in annual ?nancial reports. First, although the general categories of cash
?ows are the same (i.e. cash ?ows fromoperating, investing and ?nancing activities), the
items within those categories are generally more detailed in the 4C report. For example,
where AASB, 2007 requires just an aggregated amount for payments to suppliers and
employees, the 4C Report requires separate line items showing payments for staff costs,
advertising and marketing, research and development (R&D), leased assets and other
working capital payments. Second, because there are no quarterly income statements
accompanying the QCF reports, there is no reconciliation of operating cash ?ows and
pro?t that is otherwise required in annual ?nancial reports under AASB, 2007 (para.
Aus20.1). Finally, the 4C report stipulates other “supplementary” disclosures that are
not required by AASB, 2007, including cash out?ows to certain related parties[6].
The RPTs that must be disclosed in the 4C Report relate to cash payments to
“directors of the entity and associates of the directors” and “related entities of the entity
and associates of the related entities”. Two types of disclosures are required:
(1) payments to related parties that are included as payments to employees and
suppliers in cash ?ows from operations; and
(2) loans to related parties included in investing cash ?ows.
However, the implied de?nition of related parties in the 4C Report is somewhat
narrower than that in AASB, 2005, encompassing directors and related entities but not
senior executives or other key management personnel.[7] The ASX Listing Rules and
Guidance Notes do not provide a rationale for requiring these unique disclosures, but it
would seem that their purpose is to give an indication of the governance environment
of the reporting entity during the early start-up stage when cash burn is signi?cant and
the potential for cash mismanagement is high. These quarterly disclosure
requirements provide us with a unique opportunity to examine factors associated
with the usage of RPTs in smaller, recently listed entities.
4. Factors associated with RPTs in CTEs
The con?ict of interest hypothesis posits that RPTs are a form of agency costs where
agents (managers and directors) exploit RPTs for their own private gain at
the expense of shareholders’ interests, and accordingly, RPTs are value-destroying.
The alternative hypothesis is that RPTs are ef?cient transactions that ful?l a ?rm’s
economic needs, for example, where they take advantage of the superior knowledge
and skills of related parties and/or involve a price advantage for the ?rm. According to
Cash-based
related party
transactions
151
D
o
w
n
l
o
a
d
e
d

b
y

P
O
N
D
I
C
H
E
R
R
Y

U
N
I
V
E
R
S
I
T
Y

A
t

2
1
:
0
6

2
4

J
a
n
u
a
r
y

2
0
1
6

(
P
T
)
this hypothesis, RPTs are benign or potentially value enhancing. (Gordon et al., 2004a,
b; Kohlbeck and Mayhew, 2004).
If the con?ict of interest hypothesis is the dominating hypothesis, then mechanisms
that reduce agency costs such as effective internal and external monitoring
mechanisms and measures of ?rm performance are likely to be negatively associated
with the usage of RPTs. In contrast, if the ef?cient transaction hypothesis is the
dominant hypothesis, then internal and external monitoring mechanisms and
measures of ?rm performance are likely to be positively associated with the usage of
RPTs.
Prior US research generally ?nds support for the con?ict of interest hypothesis. We
therefore base our expectations on this hypothesis in the following discussion of
internal and external monitoring and ?rm performance factors. Findings opposite to
our expectations are likely to support the ef?cient transactions hypothesis.
4.1 Internal monitoring mechanisms and RPTs
Of the numerous governance mechanism examined in prior research, three internal
governance factors are particularly relevant in the governance of CTEs:
(1) proportion of independent members on the board of directors;
(2) the presence of an independent chairman; and
(3) the presence of an audit committee.
Prior research has extensively investigated the composition of the board of directors
and the signi?cance of independence as a governance mechanism. The ASX’s
Principles of Good Corporate Governance recommend that a majority of the board
should be comprised of independent directors (Recommendation 2.1). Independent
boards have been found to be more effective monitors of the ?nancial reporting process
and increasing the credibility of published results (Klein, 2002; Peasnell et al., 2005;
Rosenstein and Wyatt, 1990). Dechow et al. (1996) and Davidson et al. (2005) also ?nd
that boards dominated by management (i.e. less independent) are associated with
instances of earnings management.
Gordon et al. (2004b, p. 10) argue that the monitoring function for RPTs “naturally
falls under the board’s responsibilities”. Consistent with this claim, they ?nd evidence
of a positive association between the amount of RPPs to executives and the proportion
of executive directors on the governing board, suggesting that, consistent with the
con?ict of interest hypothesis, ?rms with more independent boards have smaller
amounts of RPTs. We similarly expect that higher proportions of independent
directors on CTE boards will mitigate the amounts paid to related parties, and without
such a constraint, the RPT amounts will be higher.
The presence of an independent chairman of the board of directors is another key
internal monitoring mechanism and is indicative of good corporate governance. Prior
studies have shown that when the roles of chairman and chief executive are
segregated, internal control is stronger and the board performs its key functions (such
as evaluating the chief executive’s performance) more effectively (Jensen, 1993). Indeed,
Goyal and Park (2002) ?nd that a dual chairman/chief executive role weakens the
board’s monitoring function. Gordon et al. (2004b) ?nd that ?rms with a chairman who
is also the chief executive of?cer have relatively more RPTs. Likewise, we expect that
ARJ
21,2
152
D
o
w
n
l
o
a
d
e
d

b
y

P
O
N
D
I
C
H
E
R
R
Y

U
N
I
V
E
R
S
I
T
Y

A
t

2
1
:
0
6

2
4

J
a
n
u
a
r
y

2
0
1
6

(
P
T
)
the amounts of RPTs would be minimised in CTEs with an independent chairman of
the board.
An audit committee is seen as an ef?cient device for monitoring of the integrity of
?nancial reporting (ASX, 2003, p. 29). While the ASX’s Principles of Good Corporate
Governance recommend that all companies establish an audit committee, only the top
500 companies in Australia are under obligation to do so (Recommendation 4.2; ASX
Listing Rule 12.7). The earnings management literature suggests that the absence of an
audit committee is associated with more opportunistic behaviour (Dechow et al., 1996);
however, the overall effectiveness of the committee (in preventing earnings
manipulation) is a function of its independence and meeting frequency (Davidson
et al., 2005; Xie et al., 2003). With respect to RPTs, Gordon et al. (2004b) note that some
?rms require independent members of the audit committee to approve RPTs. If a ?rm
does not have an audit committee then such monitoring cannot occur.[8] Hence,
assuming that audit committees are effective (on average), we expect that the presence
of an audit committee will provide a higher level of scrutiny over RPTs, thereby
minimising the amounts of such transactions.
4.2 External monitoring mechanisms and RPTs
Common external mechanisms shown to induce positive behavioural outcomes include
the engagement of a high-quality auditor, and monitoring by creditors, information
and ?nancial intermediaries, and the media (Gillan, 2006).
With respect to the monitoring role of auditors, DeAngelo (1981) argues that larger
audit ?rms are responsible for better quality audits because they have fewer incentives
to behave opportunistically and more concern for their broader reputation. Audits by
larger ?rms have been found to exhibit a higher earnings response coef?cient,
suggesting a higher level of credibility (Teoh and Wong, 1993). Consistent with
Willenborg (1999) and Ferguson and Matolcsy (2003) suggest that the bene?ts of audit
quality may be more pronounced in smaller companies because of the greater
likelihood of information asymmetry. We expect that audit quality, as an effective
monitoring mechanism, will constrain the amounts of RPTs within CTEs.
Apart from external auditors, the individual in?uence on CTEs of other external
monitors is dif?cult to measure as few CTEs are followed by ?nancial analysts,
creditors are rare due to low levels of debt among CTEs, and most institutional
investors do not have substantial shareholdings in CTEs. As an alternative, we use
?rm size as a proxy for these other external monitoring factors. Consistent with the
arguments of Gordon et al. (2004b) and Kohlbeck and Mayhew (2004) with respect to
external monitors, we expect that the external scrutiny of larger ?rms constrains both
the incidence and magnitude of RPTs. Similarly, we expect that companies in the ASX
top 500 are likely to be subject to greater external scrutiny and therefore limit their
RPTs.
As another proxy for external monitoring, we use the 4C reporting history. The
reporting history is of particular interest because CTEs are likely to be under greatest
scrutiny during the ?rst eight quarters (the mandatory initial reporting period) and
could be expected to be striving to achieve positive operating cash ?ows so that the
ASX permits them to cease QCF reporting. As such, they would generally be more
conscious of cash out?ows in the ?rst eight quarters and therefore seek to minimise
RPTs during that period.
Cash-based
related party
transactions
153
D
o
w
n
l
o
a
d
e
d

b
y

P
O
N
D
I
C
H
E
R
R
Y

U
N
I
V
E
R
S
I
T
Y

A
t

2
1
:
0
6

2
4

J
a
n
u
a
r
y

2
0
1
6

(
P
T
)
4.3 Financial performance and RPTs
Gordon et al. (2004b) and Kohlbeck and Mayhew (2004) ?nd a negative association
between various market measures of performance and RPTs, which they argue supports
the con?ict of interest hypothesis. Similarly, we expect that performance-related
factors relevant to CTEs will be negatively associated with RPTs usage. We use four
measures of ?rm performance: ROA, R&D expenditure, ?nancial slack and the CTE
reporting threshold test.
We select ROA as our ?rst measure of ?rm performance because it is a common
measure of ?nancial performance and it is not as volatile as market measures of CTE
performance. R&D expenditure is used as our second measure of ?rm performance
because many CTEs have large expenditure on R&D activities. As an indicator of ?rm
performance, R&D expenditure has been found to generate excess returns, and is
associated with higher market value (Lev and Sougiannis, 1996; Chan et al., 2001;
Asthana and Zhang, 2006). RPTs may restrict the funds available to undertake
bene?cial R&D activities.
The ?nancial slack available to CTEs may also affect the amount of RPTs.
High-cash balances and unused ?nancing facilities may induce managers to act for
their private gain rather than in the best interests of shareholders (Easterbrook, 1984;
Jensen, 1986; Myers and Rajan, 1998). Another important consideration is the amount
spent on operating and investing items after RPTs in terms of whether RPTs are a
substitute for other out?ows, or whether the magnitude of these transactions is
independently determined.
Whether ?rms have ceased Appendix 4C reporting and the reasons for doing so
provides a further indicator of performance. CTEs that have ceased reporting because
they have met the ASX’s threshold requirement of four consecutive QCF reports with
positive operating cash ?ows signals that these ?rm has been successful in
consistently producing positive cash ?ows from operations. In contrast, CTEs that
continue to produce negative operating cash ?ows or which have ceased reporting
because of suspension or delisting can be consider as unsuccessful ?rms.
5. Research design
5.1 Sample and data sources
The sample used in this study is based on the dataset of Gallery et al. (2004). This
database contains the population of QCF reports issued by ?rms subject to 4C
Reporting since Listing Rule 4.7B was introduced on 31 March 2000. In total, Gallery
et al. (2004) identify 331 companies that have lodged Appendix 4C QCF reports
between March 2000 and December 2003. That database has been extended to
December 2005 and this study draws on that extended dataset.
In selecting the sample, ?rms which were 4C reporting but are not technically CTEs
(i.e. not admitted under Listing Rule 1.3.2(a) or (b)) were eliminated.[9] Firms for which
there are one or more missing 4C reports in the ?rm’s reporting sequence are also
excluded. In the tests, we control for whether the ?rm has successfully reached the
minimum eight-quarter threshold and ceased 4C-reporting, and accordingly eliminate
?rms that have reported for fewer than eight quarters. The ?nal sample comprises 224
CTEs that have lodged a total of 3,827 QCF reports between March 2000 and December
2005.
ARJ
21,2
154
D
o
w
n
l
o
a
d
e
d

b
y

P
O
N
D
I
C
H
E
R
R
Y

U
N
I
V
E
R
S
I
T
Y

A
t

2
1
:
0
6

2
4

J
a
n
u
a
r
y

2
0
1
6

(
P
T
)
All QCF data used in testing were obtained from the Appendix 4C Reports of the
Gallery et al. (2004) and extended database. RPPs and RPL are disclosed in the 4C Report
at Items 1.24 and 1.25, respectively. The governance characteristics (board independence,
auditor, audit committee and chairman) were sourced from each ?rm’s annual ?nancial
report, obtained through Aspect Huntley’s FinAnalysis database. FinAnalysis was also
used to obtain half and full-year ?nancial reports from which data on assets and income
were sourced. Market data (including market capitalisation and market capitalisation
rank) were drawn from the Share Price and Price Relatives database maintained by the
Centre for Research in Finance, University of New South Wales.
5.2 Regression models
To test associations between RPTs and the factors identi?ed in Section 4, two
regression models are estimated, with RPPs entering the ?rst model and RPL entering
the second model.
Regression Model 1 is speci?ed as:
RPP
it
¼ a
0
þ a
1
INDIR
it
þa
2
CHAIR
it
þa
3
AUDC
it
þa
4
AUD
it
þ a
5
MCAP
it
þa
6
TOP500
it
þa
7
QTR8
it
þa
8
ROA
it
þ a
9
RD
it
þ a
10
FINSLACK
it
þa
11
CFOO
it
þ a
12
SUCC8
it
þ a
13
ORIG
it
þ 1
it
ð1Þ
The dependent variable RPP is the dollar amount of RPPs that is included in operating
cash ?ow payments to staff and suppliers. RPP is measured as RPPs for the quarter
de?ated by average total assets for the relevant half year. Average total assets is
calculated using the relevant half-year balances as this information is not disclosed
quarterly.
The three internal monitoring variables are: INDIR measured as the proportion of
non-executive (independent) directors on the board; CHAIR coded one (1) where the
chairman of the board is a non-executive director (independent) and zero (0) otherwise;
and AUDC coded one (1) where the ?rm has an audit committee and zero (0) otherwise.
The next set of variables represent the external monitoring factors. AUD is coded
one (1) where a Big-4 auditor is engaged and zero (0) otherwise. MCAP proxies for ?rm
size and is measured as the natural logarithm of market capitalisation on the last
trading day of the relevant quarter. Firm size can be measured by total assets, total
sales or market capitalisation (Foster, 1986). Since CTEs are generally developing
companies with no history of pro?tability, a sales measure is dif?cult to interpret.
Measuring the size of CTEs by total assets is problematic because this information is
only available half-yearly whereas RPT disclosures are made quarterly. Market
capitalisation is therefore considered to be the best proxy for size for this sample of
?rms. TOP500 represents whether the CTE was in the top 500 of ASX-listed ?rms, as
measured by market capitalisation at the end of the relevant quarter, with ?rms in the
top 500 coded one (1), otherwise zero (0). QTR8 indicates the reporting phase and is
coded zero (0) if the QCF report is in the ?rst eight quarters of the ?rm’s reporting
sequence, and one (1) otherwise.
The ?nal set of test variables are the performance-related factors. ROA is measured
as net pro?t for the relevant half-year divided by average total assets. RD measures
cash out?ows relating to R&D expenditures and is de?ated by average total assets.
FINSLACK is the sum of ending cash balance and unused ?nancing facilities for each
Cash-based
related party
transactions
155
D
o
w
n
l
o
a
d
e
d

b
y

P
O
N
D
I
C
H
E
R
R
Y

U
N
I
V
E
R
S
I
T
Y

A
t

2
1
:
0
6

2
4

J
a
n
u
a
r
y

2
0
1
6

(
P
T
)
quarter, de?ated by average total assets. CFOO is spending on items other than RPPs,
and is measured as total operating cash out?ows less RPPs, de?ated by average total
assets. SUCC is coded one (1) where a ?rm has met the ASX’s threshold of four
consecutive quarters of positive operating cash ?ows, or has otherwise been permitted
to cease 4C reporting (QCFs) by the ASX, and zero (0) otherwise.
Finally, whether a company originally listed as a CTE (i.e. an IPO), or was
previously listed and has converted to a CTE[10] may also be associated with RPTs.
There may be differences in the corporate governance and economic characteristics of
these ?rms, and in turn, the amount of RPTs entered into. ORIG is therefore included
as a control variable and is coded one (1) where ?rms were already ASX-listed and then
changed their activities and were readmitted as CTEs; ?rms that are coded zero (0) are
those originally listed as CTEs.
In regression Model 2 the dependent variable is loans to related parties (RPL):
RPL
it
¼ a
0
þa
1
INDIR
it
þ a
2
CHAIR
it
þ a
3
AUDC
it
þ a
4
AUD
it
þ a
5
MCAP
it
þa
6
TOP500
it
þa
7
QTR8
it
þ a
8
ROA
it
þ a
9
RD
it
þa
10
FINSLACK
it
þa
11
CFIO
it
þ a
12
SUCC8
it
þ a
13
ORIG
it
þ 1
it
ð2Þ
RPL is measured as loans to related parties, de?ated by average total assets. The
independent variables are the same as for Model 1, except for CFIO, which is cash
expenditures on investing activities, other than loans to related parties.
Pooled cross-sectional time-series data can potentially be serially correlated, which
would violate the independent observations assumption of regression analysis (Greene,
2000). Lagrange Multiplier Tests con?rmed that the classical regression model should
not be used and therefore a random effects model is employed in regression analyses.
Also, the two dependent variables are censored in that signi?cant proportions of the
observations have no RPPs or loans, and thus have a value of zero.[11] “Conventional
regression methods fail to account for the qualitative difference between limit (zero)
observations and nonlimit (continuous) observations” (Greene, 2000, p. 906).
Accordingly, the Tobit model is applied in the regression analysis.
6. Results
The distribution of sample ?rms across the 24-quarter study period is presented in
Table I. The number of new CTEs was highest in March 2000 with 59 ?rms listing,
however this steadily declined to zero new ?rms listing in September 2003. Numbers
have since increased however, with 104 CTEs listing between March 2004 and
December 2005 (untabulated). Interestingly, of the 59 CTEs that began reporting in
March 2000, 30 were continuing to report as at December 2005, which is well beyond
the initial eight-quarter monitoring period.
Table II provides a distribution of sample ?rms by the Global Industry
Classi?cation Standard (GICS). Health care (24.1 per cent) and information technology
(28.1 per cent) are the dominant sectors, representing just over half of all of the ?rms
examined. This is consistent with the “new economy” activities of many of the CTEs.
6.1 Descriptive statistics
Table III provides descriptive statistics for the raw data and Table IV presents the
de?ated variables used in statistical testing.[12] Table III, Panel A shows that the mean
ARJ
21,2
156
D
o
w
n
l
o
a
d
e
d

b
y

P
O
N
D
I
C
H
E
R
R
Y

U
N
I
V
E
R
S
I
T
Y

A
t

2
1
:
0
6

2
4

J
a
n
u
a
r
y

2
0
1
6

(
P
T
)
Q
u
a
r
t
e
r
n
u
m
b
e
r
1
2
3
4
5
6
7
8
9
1
0
1
1
1
2
1
3
1
4
1
5
1
6
1
7
1
8
1
9
2
0
2
1
2
2
2
3
2
4
R
e
p
o
r
t
n
o
M
a
r
c
h
2
0
0
0
J
u
n
e
2
0
0
0
S
e
p
t
e
m
b
e
r
2
0
0
0
D
e
c
e
m
b
e
r
2
0
0
0
M
a
r
c
h
2
0
0
1
J
u
n
e
2
0
0
1
S
e
p
t
e
m
b
e
r
2
0
0
1
D
e
c
e
m
b
e
r
2
0
0
1
M
a
r
c
h
2
0
0
2
J
u
n
e
2
0
0
2
S
e
p
t
e
m
b
e
r
2
0
0
2
D
e
c
e
m
b
e
r
2
0
0
2
M
a
r
c
h
2
0
0
3
J
u
n
e
2
0
0
3
S
e
p
t
e
m
b
e
r
2
0
0
3
D
e
c
e
m
b
e
r
2
0
0
3
M
a
r
c
h
2
0
0
4
J
u
n
e
2
0
0
4
S
e
p
t
e
m
b
e
r
2
0
0
4
D
e
c
e
m
b
e
r
2
0
0
4
M
a
r
c
h
2
0
0
5
J
u
n
e
2
0
0
5
S
e
p
t
e
m
b
e
r
2
0
0
5
D
e
c
e
m
b
e
r
2
0
0
5
T
o
t
a
l
1
5
9
3
3
2
5
1
9
2
0
6
1
3
7
7
1
3
2
5
3
2
0
1
0
2
2
4
2
5
9
3
3
2
5
1
9
2
0
6
1
3
7
7
1
3
2
5
3
2
0
1
0
2
2
4
3
5
9
3
3
2
5
1
9
2
0
6
1
3
7
7
1
3
2
5
3
2
0
1
0
2
2
4
4
5
9
3
3
2
5
1
9
2
0
6
1
3
7
7
1
3
2
5
3
2
0
1
0
2
2
4
5
5
9
3
3
2
5
1
9
2
0
6
1
3
7
7
1
3
2
5
3
2
0
1
0
2
2
4
6
5
9
3
3
2
5
1
9
2
0
6
1
3
7
7
1
3
2
5
3
2
0
1
0
2
2
4
7
5
9
3
3
2
5
1
9
1
9
6
1
3
7
7
1
3
2
5
3
2
0
1
0
2
2
3
8
5
9
3
3
2
5
1
9
1
9
6
1
3
7
7
1
3
2
3
3
2
0
1
0
2
2
1
9
5
4
3
3
2
3
1
9
1
7
6
1
2
7
7
1
1
2
3
1
2
0
1
0
2
0
7
1
0
5
3
3
1
2
2
1
8
1
7
6
1
2
6
7
1
0
1
2
1
2
0
1
8
8
1
1
5
2
2
8
2
1
1
6
1
7
6
1
2
6
7
1
0
1
2
1
2
1
8
1
1
2
5
2
2
7
2
0
1
5
1
6
6
1
2
6
7
9
1
2
1
1
7
4
1
3
4
9
2
7
2
0
1
4
1
6
5
1
2
6
7
9
1
2
1
6
8
1
4
4
6
2
5
1
9
1
4
1
6
5
1
2
6
7
8
1
1
5
9
1
5
4
2
2
5
1
8
1
4
1
4
5
1
2
6
7
8
1
5
1
1
6
3
9
2
5
1
6
1
3
1
2
5
1
2
6
7
1
3
5
1
7
3
9
2
5
1
6
1
2
1
2
5
1
2
6
1
2
7
1
8
3
8
2
4
1
5
1
2
1
2
5
1
2
1
1
8
1
9
3
7
2
5
1
5
1
2
1
2
5
1
0
6
2
0
3
5
2
3
1
4
1
2
1
2
9
6
2
1
3
3
2
2
1
4
1
2
8
1
2
2
3
1
2
2
1
4
6
7
2
3
3
1
2
0
5
1
2
4
3
0
3
0
T
o
t
a
l
5
9
9
2
1
1
7
1
3
6
1
5
6
1
6
2
1
7
5
1
8
2
1
8
4
1
9
6
1
9
2
1
9
3
1
8
8
1
8
4
1
7
6
1
8
0
1
7
8
1
7
2
1
6
4
1
5
8
1
5
0
1
4
6
1
4
5
1
4
2
3
,
8
2
7
N
o
t
e
:
S
h
a
d
e
d
c
e
l
l
s
r
e
p
r
e
s
e
n
t
o
b
s
e
r
v
a
t
i
o
n
s
f
o
r
?
r
m
s
w
i
t
h
l
e
s
s
t
h
a
n
e
i
g
h
t
Q
C
F
r
e
p
o
r
t
s
w
h
i
c
h
h
a
v
e
b
e
e
n
o
m
i
t
t
e
d
f
r
o
m
t
h
e
a
n
a
l
y
s
i
s
Table I.
Distribution of test
sample CTE ?rm-quarter
observations by report
number and quarterly
date
Cash-based
related party
transactions
157
D
o
w
n
l
o
a
d
e
d

b
y

P
O
N
D
I
C
H
E
R
R
Y

U
N
I
V
E
R
S
I
T
Y

A
t

2
1
:
0
6

2
4

J
a
n
u
a
r
y

2
0
1
6

(
P
T
)
(median) market capitalisation of CTEs is $31.6 million ($9.2 million), indicating that
CTEs are generally smaller ?rms. However, 72 companies (8.04 per cent) were in the
ASX top 500 companies for at least one quarter (Table IV, Panel B).
The frequencies shown in Panel B of Table III indicate that RPPs are ubiquitous
with almost all ?rms (99.1 per cent) reporting such payments in at least one quarter,
with a mean (median) value of $149,000 ($89,000). RPL are less common, although still
reasonably widespread, with 53 companies (23.7 per cent) disclosing such loans; the
median value is $52,000.
The descriptive statistics for the internal monitoring factors in Table IV show that,
on average, the boards of CTEs are independent with a mean proportion of 57.5 per cent
of non-executive directors, most of the CTEs (59.8 per cent) have an audit committee
Quarterly observations Firms
GICS industry classi?cation n Per cent n Per cent
Consumer discretionary 531 13.9 30 13.4
Consumer staples 93 2.4 6 2.7
Financials 365 9.5 25 11.2
Health care 937 24.5 54 24.1
Industrials 348 9.1 22 9.8
Information technology 1,157 30.2 63 28.1
Materials 116 3.0 8 3.6
Telecommunications services 201 5.3 11 4.9
Utilities 79 2.1 5 2.2
Total 3,827 100.0 224 100.0
Table II.
Distribution of sample
?rms by industry
Mean Median SD Minimum Maximum
n $000 $000 $000 $000 $000
Panel A: All ?rm-year observations
Related party payments 3,827 136 82 484 0 19,957
– for ?rms with RPPs 3,480 149 89 505 1 19,957
Related party loans 3,827 89 0 4,703 0 290,164
– for ?rms with RPL 119 2,858 52 26,630 4 290,164
Related party transactions 3,827 224 83 4,725 0 290,164
– for ?rms with RPTs 3,495 246 90 4,944 1 290,164
Market capitalisation 3,827 31,612 9,166 129,629 106 4,058,218
Total assets 3,827 23,491 8,974 115,882 13 3,607,628
Financial slack 3,827 5,854 2,072 22,243 23,775 597,445
R&D out?ows 3,827 174 0 927 0 34,935
Half-year pro?t 3,827 22,415 2877 16,642 2485,985 345,248
Number of 4C Reports per ?rm 224 17 18 5 8 24
Panel B: Frequencies of RPTs
0 1
n ¼ 224 n Per cent n Per cent
Related party payments 2 0.9 222 99.1
Related party loans 171 76.3 53 23.7
Related party transactions 1 0.4 223 99.6
Table III.
Descriptive statistics
for sample ?rms
ARJ
21,2
158
D
o
w
n
l
o
a
d
e
d

b
y

P
O
N
D
I
C
H
E
R
R
Y

U
N
I
V
E
R
S
I
T
Y

A
t

2
1
:
0
6

2
4

J
a
n
u
a
r
y

2
0
1
6

(
P
T
)
and two-thirds have an independent chairman. For the external monitoring factors, the
statistics show that fewer than half of the CTEs (41.5 per cent) engage a Big-4 auditor,
perhaps re?ecting the high proportion of smaller ?rms, which are likely to fall outside
the Big-4 ?rms’ target client base. In relation to performance factors, the statistics reveal
generally poor pro?tability among CTEs with mean (median) negative 20 per cent
(negative 13 per cent) ROA. Only 46 of the 224 CTEs (20.5 per cent) achieved the ASX’s
threshold to cease 4C reporting, indicating that CTEs generally struggle to generate
positive operating cash ?ows. The dif?culty of meeting this threshold is further
demonstrated by each ?rm, on average, lodging 17 QCF reports, which is well beyond
the minimum eight-quarter reporting period.
Table V presents the correlation matrix of variables included in regression tests,
with Pearson (Spearman) correlation coef?cients and p-values shown above (below)
Mean Median SD Minimum Maximum
Panel A: continuous variables (n ¼ 3,827)
RPP 0.0156 0.0087 0.0197 0.0000 0.1000
RPL 0.0006 0.0000 0.0060 20.0007 0.1000
INDIR 0.5745 0.6000 0.1936 0.0000 1.0000
MCAP 9.2295 9.1200 1.3181 4.6600 15.2200
ROA 20.2003 20.1302 0.2709 21.0000 0.5000
RD 0.0135 0.0000 0.0385 0.0000 0.5000
FINSLACK 0.3954 0.3079 0.3347 0.0000 1.5000
CFOO 0.2212 0.1464 0.2264 0.0000 1.0000
CFIO 0.0354 0.0067 0.0902 0.0000 1.0000
Panel B: Dichotomous variables (n ¼ 224) Frequencies
0 1
n Per cent n Per cent
CHAIR 72 32.1 152 67.9
AUDC 90 40.2 134 59.8
AUD 131 58.5 93 41.5
TOP500 199 88.8 25 11.2
SUCC 178 79.5 46 20.5
ORIG 160 71.4 64 28.6
Notes: RPP is RPPs in the quarter de?ated by average total assets (average total assets is calculated
using the relevant half-year balances); RPL is RPL de?ated by average total assets; INDIR is the
proportion of non-executive directors on the board of each ?rm; MCAP is the natural logarithm of
market capitalisation measured at the last trading day of the relevant quarter; ROA is the net pro?t for
the relevant half-year divided by average total assets; RD is cash out?ows relating to R&D
expenditure de?ated by average total assets; FINSLACK is the sum of the ending cash balance at the
end of the quarter and any ?nancing facilities available de?ated by average total assets; CFOO is total
operating cash out?ows less-RPPs de?ated by average total assets; CFIO cash out?ows from investing
activities less- RPL de?ated by average total assets; CHAIR is coded one for ?rms with an independent
chairman and zero otherwise; AUDC is coded one for ?rms with an audit committee and zero
otherwise; AUD is coded one for ?rms with a Big-4 auditor and zero otherwise; TOP500 is coded one
where a ?rm is in the Top 500 companies on the ASX in the relevant quarter (as measured by market
capitalisation) and zero otherwise; QTR8 is coded zero where the 4C Report is lodged in the ?rst eight
quarters and one otherwise; SUCC is coded one where a ?rm has stopped reporting because it has met
the ASX’s requirement for positive operating cash ?ows, and zero otherwise; ORIG is coded one for
?rms which were ASX-listed prior to admission as a CTE (i.e. changed activities) and zero otherwise
Table IV.
Test variables
Cash-based
related party
transactions
159
D
o
w
n
l
o
a
d
e
d

b
y

P
O
N
D
I
C
H
E
R
R
Y

U
N
I
V
E
R
S
I
T
Y

A
t

2
1
:
0
6

2
4

J
a
n
u
a
r
y

2
0
1
6

(
P
T
)
T
e
s
t
v
a
r
i
a
b
l
e
s
R
P
P
R
P
L
I
N
D
I
R
C
H
A
I
R
A
U
D
C
A
U
D
M
C
A
P
T
O
P
5
0
0
Q
T
R
8
R
O
A
R
D
F
I
N
S
L
A
C
K
C
F
O
O
C
F
I
O
S
U
C
C
O
R
I
G
R
P
P
1
.
0
0
0
0
0
.
0
2
5
3
2
0
.
0
3
1
4
0
.
0
4
8
2
2
0
.
0
2
2
9
2
0
.
0
2
7
3
2
0
.
2
9
1
6
2
0
.
1
5
3
5
0
.
0
7
7
0
2
0
.
2
8
2
2
0
.
0
8
9
1
0
.
2
3
4
2
0
.
1
2
3
4
0
.
0
3
0
5
2
0
.
1
2
2
2
2
0
.
0
2
6
0
0
.
1
1
8
1
0
.
0
5
1
8
0
.
0
0
2
9
0
.
1
5
6
8
0
.
0
9
1
9
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
5
9
3
0
.
0
0
0
0
0
.
1
0
7
5
R
P
L
2
0
.
0
7
1
0
1
.
0
0
0
0
2
0
.
0
0
5
5
0
.
0
0
9
4
0
.
0
0
3
0
2
0
.
0
0
7
2
2
0
.
0
1
0
6
2
0
.
0
1
1
8
2
0
.
0
3
5
5
0
.
0
0
1
1
2
0
.
0
2
6
6
2
0
.
0
1
7
9
2
0
.
0
0
7
9
0
.
0
6
1
2
2
0
.
0
0
7
7
2
0
.
0
0
2
6
0
.
0
0
0
0
0
.
7
3
1
6
0
.
5
6
2
1
0
.
8
5
1
5
0
.
6
5
5
4
0
.
5
1
2
4
0
.
4
6
3
7
0
.
0
2
8
0
0
.
9
4
4
6
0
.
0
9
9
4
0
.
2
6
7
3
0
.
6
2
3
6
0
.
0
0
0
2
0
.
6
3
4
3
0
.
8
7
2
9
I
N
D
I
R
2
0
.
0
6
1
7
0
.
0
1
5
4
1
.
0
0
0
0
0
.
4
0
6
1
0
.
2
2
8
7
0
.
1
2
1
8
0
.
0
8
9
5
0
.
0
2
7
2
2
0
.
0
0
8
9
0
.
0
1
2
8
0
.
0
8
0
9
0
.
1
7
3
0
0
.
0
5
8
3
2
0
.
0
0
6
2
2
0
.
0
0
9
4
2
0
.
3
1
6
8
0
.
0
0
0
1
0
.
3
4
1
6
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
9
1
9
0
.
5
8
1
4
0
.
4
3
0
2
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
3
0
.
7
0
2
4
0
.
5
5
9
1
0
.
0
0
0
0
C
H
A
I
R
0
.
0
0
9
4
2
0
.
0
0
5
5
0
.
3
6
5
6
1
.
0
0
0
0
0
.
1
7
0
3
2
0
.
0
5
1
4
2
0
.
0
0
1
5
2
0
.
0
2
3
5
2
0
.
0
3
8
3
0
.
0
0
5
6
0
.
0
3
7
5
0
.
0
0
4
5
0
.
1
3
4
9
0
.
0
0
5
3
0
.
0
8
4
0
2
0
.
3
8
3
8
0
.
5
6
3
1
0
.
7
3
4
8
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
1
5
0
.
9
2
6
6
0
.
1
4
6
9
0
.
0
1
7
9
0
.
7
3
0
9
0
.
0
2
0
5
0
.
7
8
0
9
0
.
0
0
0
0
0
.
7
4
5
2
0
.
0
0
0
0
0
.
0
0
0
0
A
U
D
C
2
0
.
0
6
4
3
2
0
.
0
0
7
1
0
.
1
8
7
5
0
.
1
7
0
3
1
.
0
0
0
0
0
.
0
9
1
5
0
.
1
2
8
6
0
.
0
7
8
6
2
0
.
0
4
0
1
2
0
.
0
1
2
7
0
.
0
4
7
7
0
.
0
0
0
1
0
.
1
0
5
2
0
.
0
4
3
5
0
.
1
6
2
7
2
0
.
0
2
3
1
0
.
0
0
0
1
0
.
6
6
1
3
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
1
3
0
0
.
4
3
0
7
0
.
0
0
3
2
0
.
9
9
6
1
0
.
0
0
0
0
0
.
0
0
7
1
0
.
0
0
0
0
0
.
1
5
2
3
A
U
D
2
0
.
0
3
4
5
2
0
.
0
0
6
4
0
.
1
1
8
8
2
0
.
0
5
1
4
0
.
0
9
1
5
1
.
0
0
0
0
0
.
2
6
4
5
0
.
1
7
2
5
2
0
.
0
1
4
2
0
.
0
5
4
1
0
.
0
8
0
7
0
.
0
9
8
7
2
0
.
0
8
9
3
0
.
0
2
6
9
0
.
1
0
1
1
2
0
.
0
2
7
2
0
.
0
3
3
0
0
.
6
9
1
2
0
.
0
0
0
0
0
.
0
0
1
5
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
3
8
1
3
0
.
0
0
0
8
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
9
6
7
0
.
0
0
0
0
0
.
0
9
2
6
M
C
A
P
2
0
.
3
1
9
9
0
.
0
0
4
7
0
.
0
8
5
2
2
0
.
0
0
7
0
0
.
1
1
6
3
0
.
2
5
7
4
1
.
0
0
0
0
0
.
6
2
0
8
2
0
.
0
0
5
2
0
.
2
0
3
3
0
.
1
1
4
1
2
0
.
0
8
7
5
2
0
.
0
7
7
7
0
.
0
7
7
6
0
.
2
4
4
6
2
0
.
0
6
9
8
0
.
0
0
0
0
0
.
7
7
3
4
0
.
0
0
0
0
0
.
6
6
5
5
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
7
4
6
5
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
T
O
P
5
0
0
2
0
.
1
8
8
3
2
0
.
0
1
8
2
0
.
0
2
3
8
2
0
.
0
2
3
5
0
.
0
7
8
6
0
.
1
7
2
5
0
.
5
1
4
6
1
.
0
0
0
0
2
0
.
0
3
5
1
0
.
1
3
9
0
0
.
0
3
7
7
2
0
.
0
2
4
4
2
0
.
0
3
7
2
0
.
0
4
9
6
0
.
2
0
3
6
2
0
.
0
4
8
7
0
.
0
0
0
0
0
.
2
5
9
3
0
.
1
4
1
6
0
.
1
4
6
9
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
3
0
0
0
.
0
0
0
0
0
.
0
1
9
7
0
.
1
3
1
6
0
.
0
2
1
4
0
.
0
0
2
1
0
.
0
0
0
0
0
.
0
0
2
6
Q
T
R
8
0
.
0
8
4
6
2
0
.
0
6
0
7
2
0
.
0
0
7
8
2
0
.
0
3
8
3
2
0
.
0
4
0
1
2
0
.
0
1
4
2
0
.
0
0
5
2
2
0
.
0
3
5
1
1
.
0
0
0
0
0
.
0
0
8
3
0
.
0
7
1
7
2
0
.
0
6
4
8
0
.
1
5
1
8
2
0
.
0
5
8
2
2
0
.
1
5
6
0
0
.
0
4
2
5
0
.
0
0
0
0
0
.
0
0
0
2
0
.
6
2
9
2
0
.
0
1
7
9
0
.
0
1
3
0
0
.
3
8
1
3
0
.
7
4
7
2
0
.
0
3
0
0
0
.
6
0
6
5
0
.
0
0
0
0
0
.
0
0
0
1
0
.
0
0
0
0
0
.
0
0
0
3
0
.
0
0
0
0
0
.
0
0
8
6
R
O
A
2
0
.
3
1
0
1
0
.
0
1
1
6
0
.
0
3
4
8
0
.
0
2
6
6
0
.
0
3
5
6
0
.
0
5
5
5
0
.
2
3
2
5
0
.
1
5
5
6
0
.
0
1
5
6
1
.
0
0
0
0
2
0
.
1
0
5
8
2
0
.
1
9
1
3
2
0
.
1
1
9
4
0
.
0
4
8
3
0
.
1
8
6
2
2
0
.
0
6
9
5
0
.
0
0
0
0
0
.
4
7
3
2
0
.
0
3
1
1
0
.
1
0
0
2
0
.
0
2
7
6
0
.
0
0
0
6
0
.
0
0
0
0
0
.
0
0
0
0
0
.
3
3
4
2
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
2
8
0
.
0
0
0
0
0
.
0
0
0
0
R
D
0
.
0
9
9
2
2
0
.
0
7
1
7
0
.
1
3
7
1
0
.
0
0
1
7
0
.
0
1
7
6
0
.
0
5
3
4
0
.
2
4
3
3
0
.
1
1
2
4
0
.
0
1
9
1
2
0
.
1
4
4
0
1
.
0
0
0
0
0
.
1
2
7
4
0
.
0
8
0
8
2
0
.
0
7
5
6
2
0
.
0
9
7
0
2
0
.
0
4
3
2
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
9
1
5
1
0
.
2
7
5
9
0
.
0
0
1
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
2
3
8
3
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
7
6
F
I
N
S
L
A
C
K
0
.
3
0
0
3
2
0
.
0
4
2
6
0
.
1
5
7
7
2
0
.
0
0
4
1
2
0
.
0
0
1
0
0
.
1
2
2
5
2
0
.
0
5
0
0
0
.
0
0
6
8
2
0
.
0
6
5
7
2
0
.
1
9
1
1
0
.
1
3
9
2
1
.
0
0
0
0
0
.
0
0
6
4
2
0
.
0
6
6
5
2
0
.
0
7
0
5
2
0
.
1
4
7
2
0
.
0
0
0
0
0
.
0
0
8
3
0
.
0
0
0
0
0
.
8
0
0
0
0
.
9
5
2
9
0
.
0
0
0
0
0
.
0
0
2
0
0
.
6
7
5
5
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
6
9
3
9
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
C
F
O
O
0
.
1
8
1
1
2
0
.
0
0
4
3
0
.
0
2
7
8
0
.
1
6
6
6
0
.
1
5
6
1
2
0
.
0
6
3
6
2
0
.
0
4
6
9
2
0
.
0
3
0
1
0
.
1
5
0
9
2
0
.
0
9
0
1
2
0
.
0
5
5
5
0
.
0
4
9
2
1
.
0
0
0
0
2
0
.
0
1
9
3
0
.
1
0
2
2
2
0
.
1
0
4
7
0
.
0
0
0
0
0
.
7
9
0
0
0
.
0
8
5
4
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
1
0
.
0
0
3
7
0
.
0
6
2
2
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
6
0
.
0
0
2
3
0
.
2
3
2
0
0
.
0
0
0
0
0
.
0
0
0
0
C
F
I
O
2
0
.
0
5
5
3
0
.
0
6
4
9
2
0
.
0
3
7
7
0
.
0
0
1
6
0
.
0
7
4
5
0
.
0
5
2
4
0
.
1
8
3
4
0
.
1
2
9
5
2
0
.
1
3
4
3
0
.
0
8
3
4
2
0
.
1
6
7
2
2
0
.
0
5
9
3
0
.
0
8
9
2
1
.
0
0
0
0
0
.
0
4
0
9
2
0
.
0
1
9
7
0
.
0
0
0
6
0
.
0
0
0
1
0
.
0
1
9
6
0
.
9
2
1
0
0
.
0
0
0
0
0
.
0
0
1
2
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
2
0
.
0
0
0
0
0
.
0
1
1
4
0
.
2
2
3
1
S
U
C
C
2
0
.
1
6
4
6
0
.
0
0
4
1
2
0
.
0
0
7
7
0
.
0
8
4
0
0
.
1
6
2
7
0
.
1
0
1
1
0
.
2
2
3
3
0
.
2
0
3
6
2
0
.
1
5
6
0
0
.
2
3
9
3
2
0
.
1
5
2
7
2
0
.
0
4
3
9
0
.
1
3
5
6
0
.
1
4
2
9
1
.
0
0
0
0
2
0
.
1
0
0
3
0
.
0
0
0
0
0
.
8
0
0
1
0
.
6
3
5
9
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
6
6
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
O
R
I
G
2
0
.
0
3
3
1
0
.
0
2
7
8
2
0
.
3
0
3
7
2
0
.
3
8
3
8
2
0
.
0
2
3
1
2
0
.
0
2
7
2
2
0
.
0
5
2
3
2
0
.
0
4
8
7
0
.
0
4
2
5
2
0
.
0
7
7
9
2
0
.
0
7
0
4
2
0
.
1
6
7
4
2
0
.
1
5
8
0
2
0
.
0
4
3
0
2
0
.
1
0
0
3
1
.
0
0
0
0
0
.
0
4
0
4
0
.
0
8
5
8
0
.
0
0
0
0
0
.
0
0
0
0
0
.
1
5
2
3
0
.
0
9
2
6
0
.
0
0
1
2
0
.
0
0
2
6
0
.
0
0
8
6
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
0
0
0
.
0
0
7
8
0
.
0
0
0
0
Table V.
Pearson correlation
coef?cients and p-values
above the diagonal and
Spearman correlation
coef?cients and p-values
below the diagonal
ARJ
21,2
160
D
o
w
n
l
o
a
d
e
d

b
y

P
O
N
D
I
C
H
E
R
R
Y

U
N
I
V
E
R
S
I
T
Y

A
t

2
1
:
0
6

2
4

J
a
n
u
a
r
y

2
0
1
6

(
P
T
)
the diagonal. There are no signi?cantly high correlations among the independent
variables, indicating that multicollinearity is not likely to be a threat to the interpretation
of the subsequent analysis.
6.2 Regression results
The results of multivariate tests are shown in Table VI[13]. Regression Model (1) tests
for associations between RPPs and internal and external monitoring factors, and ?rm
Model 1 (RPP) Model 2 (RPL)
Pred Coef?cient Coef?cient
Variables Sign t-statistic t-statistic
Intercept 0.0338 20.1241
7.8700
* *
24.9600
* *
INDIR 2 20.0083 0.0166
21.7900
*
1.2400
CHAIR 2 0.0030 20.0031
1.5400 20.5600
AUDC 2 20.0009 20.0030
20.5100 20.6200
AUD 2 0.0014 20.0012
0.8400 20.2400
MCAP 2 20.0028 0.0035
27.9700
* *
1.4600
TOP500 2 0.0012 20.0186
0.9300 21.7100
*
QTR8 þ 0.0025 20.0168
4.2700
* *
23.4600
* *
ROA 2 20.0096 20.0076
28.2200
* *
20.8700
RD 2 0.0444 20.5533
5.0700
* *
22.7800
* *
FINSLACK þ 0.0111 20.0213
9.4100
* *
22.4800
*
CFOO 2 0.0095
5.2200
* *
CFIO 2 0.0530
* *
3.0300
SUCC 2 20.0037 20.0057
21.7600
*
20.8200
ORIG ? 20.0005 0.0017
20.2400 0.3300
N 3827 3827
x
2
401.47 35.80
p-Value 0.0000 0.0006
Notes: Model 1: RPP
it
¼ a
0
þa
1
INDIR
it
þa
2
CHAIR
it
þa
3
AUDC
it
þa
4
AUD
it
þa
5
MCAP
it
þa
6
TOP500
it
þa
7
QTR8
it
þa
8
ROA
it
þa
9
RD
it
þa
10
FINSLACK
it
þa
11
CFOO
it
þa
12
SUCC8
it
þa
13
ORIG
it
þ1
it
; Model 2: RPL
it
¼ a
0
þa
1
INDIR
it
þa
2
CHAIR
it
þa
3
AUDC
it
þa
4
AUD
it
þa
5
MCAP
it
þa
6
TOP500
it
þa
7
QTR8
it
þa
8
ROA
it
þa
9
RD
it
þa
10
FINSLACK
it
þa
11
CFIO
it
þa
12
SUCC8
it
þa
13
ORIG
it
þ1
it
; Table IV for variable de?nitions. p-values signi?cant
*
, 0.05 and
* *
, 0.01 (one-tailed), respectively
Table VI.
Tobit regressions of
RPPs and loans
Cash-based
related party
transactions
161
D
o
w
n
l
o
a
d
e
d

b
y

P
O
N
D
I
C
H
E
R
R
Y

U
N
I
V
E
R
S
I
T
Y

A
t

2
1
:
0
6

2
4

J
a
n
u
a
r
y

2
0
1
6

(
P
T
)
performance factors. For the internal monitoring factors, the signi?cant negative
coef?cient for INDIR (t ¼ 1.79, p , 0.05) suggests that the higher the proportion of
independent directors on the board, the smaller the amounts of payments to related
parties. Thus, it would appear that non-executive directors constrain payments to
related parties. None of the coef?cients for the other two internal monitoring factors
(the presence of an audit committee and independent chairman) is signi?cant. Thus,
these other commonly accepted indicators of good governance practices do not appear
to constrain RPPs in CTEs.
For the external monitoring factors, the results in Table VI reveal that auditor
quality (AUD) has no signi?cant in?uence on the RPTs. However, larger ?rms have
relatively smaller amounts of RPPs, with the coef?cient for MCAP negative and
signi?cant (t ¼ 27.97, p , 0.01). This result is consistent with larger ?rms being
subject to greater external monitoring through their increased scrutiny by analysts,
institutional investors, creditors and the media. The coef?cient for QTR8 is also
positive and signi?cant (t ¼ 4.27, p , 0.01), indicating that ?rms spent smaller
amounts on RPPs in the ?rst eight quarters of 4C reporting. During the initial
mandatory reporting period, there is likely to be greater ASX and other external
scrutiny over the QCF reports, and ?rms are likely to be striving to achieve the positive
operating cash ?ows to be allowed to cease reporting. In contrast, ?rms that have failed
to meet this target during the ?rst eight quarters subsequently spend greater amounts
on RPPs in periods beyond the initial eight quarters.
With respect to the performance factors, the Table VI results show that, contrary to
expectations, the coef?cients for CFOO (t ¼ 5.22, p , 0.01) and RD (t ¼ 5.07, p , 0.01)
are signi?cantly positive, implying that CTEs with higher amounts of payments to
related parties also spend higher amounts on other operating activities and R&D. This
?nding is consistent with the ef?cient transaction hypothesis in that RPPs could be
interpreted as being part of legitimate cash out?ows for productive activities. However,
results for most other performance variables provide support for the con?ict of interest
hypothesis. The coef?cient for ROA (t ¼ 28.22, p , 0.01) indicates that ?rms with
low pro?tability have greater amounts of RPPs. CTEs with greater holdings of cash
and access to ?nancing facilities (FINSLACK) have larger amounts of RPPs (t ¼ 9.41,
p , 0.01). This could be of concern given that CTEs, by their nature, have considerable
cash assets.
A further indicator of ?rm performance for this sample of CTEs is whether the ?rm
achieved four consecutive quarters of positive cash ?ows from operations and the ASX
permitted the ?rm to cease QCF (4C) reporting. The signi?cant negative coef?cient for
SUCC (t ¼ 21.76, p , 0.05) shows those ?rms that were successful in reaching the
ASX’s threshold to cease 4C reporting had smaller amounts of RPPs. Consistent with
the ?ndings of Gordon et al. (2004b) and Kohlbeck and Mayhew (2004), these results
provide further evidence that poorer performing ?rms have greater amounts of RPPs
and that such transactions are a con?ict of interest rather than ef?cient, value-adding
transactions.
Regression Model (2) tests for associations between RPL and the same factors tested
in Model (1), except the cash investing out?ows variable (CFIO) replaces the operating
cash out?ows variable (CFOO). Results presented in Table VI showthat none of internal
monitoring factors and only one of the external governance factors (TOP500) is
signi?cant in the expected direction. While the negative coef?cient for TOP500
ARJ
21,2
162
D
o
w
n
l
o
a
d
e
d

b
y

P
O
N
D
I
C
H
E
R
R
Y

U
N
I
V
E
R
S
I
T
Y

A
t

2
1
:
0
6

2
4

J
a
n
u
a
r
y

2
0
1
6

(
P
T
)
(t ¼ 21.71, p , 0.05) indicates that ?rms under greater scrutiny by analysts and the
media are less likely to have RPL, a similar result is not evident for CTEs in their ?rst
eight reporting quarters (QTR8). With respect to the performance variables, the negative
coef?cient for RD(t ¼ 22.78, p , 0.01) implies that in the presence of RPL, CTEs spend
less on R&Dactivities, possibly forgoing opportunities that could generate positive cash
?ows in the future. Interestingly, the coef?cient for FINSLACKis signi?cantly negative
(t ¼ 22.48, p , 0.05), indicating that ?rms with RPL have lower cash reserves and
other ?nancing facilities available to them; thus RPL have a negative impact on the
?rm’s cash position. Generally, the results for RPL are consistent but weaker than those
reported for RPPs. The small number of ?rms with RPL and the small amounts
associated with each transactions have possibly contributed to the weaker ?ndings for
these transactions relative to related paper payments.
7. Conclusion
This paper investigates associations between RPTs and three set of factors found to be
associated with RPTs in prior literature: internal and external corporate monitoring
mechanisms, and ?rmperformance. While previous research has examined the RPTs of
large US companies, our study focuses on smaller, newly listed Australian companies.
The general characteristics of these ?rms, and their unique reporting requirements,
provide an interesting setting in which to examine factors associated with RPTs.
QCF reports of 224 smaller, new economy companies over the 24 quarters between
March 2000 and December 2005 (comprising a total of 3,827 observations) were
examined. It was expected that strong internal and external monitoring mechanisms
would constrain the amounts of payments and loans to related parties.
Overall, our ?ndings indicate that, apart from board independence, other
well-accepted indicators of good internal corporate governance do not constrain the
amounts of RPTs within the population of CTEs. Instead, external monitoring
mechanisms are found to be the more important in?uences. Greater external
monitoring, associated both with larger ?rm size and the initial eight-quarter reporting
period, appears to be a most effective restraint on the magnitude of RPTs within CTEs.
Furthermore, the ?ndings of associations between greater amounts of RPTs and lower
returns on assets and failure to achieve positive operating cash ?ows necessary to be
permitted to cease QCF reporting, demonstrates that RPTs are associated with poor
performance. These ?ndings are generally support the conclusion of Gordon et al.
(2004b) and Kohlbeck and Mayhew (2004) that RPTs are not economically ef?cient and
con?ict with shareholders’ interests.
These ?ndings have a number of important implications for both regulators and
market participants. First, the general absence of associations with factors that are
widely accepted as indicative of good internal governance suggests that such
governance characteristics are not effective in constraining RPTs in the context of
smaller, cashbox companies. Our results suggest that external monitoring may be a
more effective control over RPTs thaninternal corporate governance mechanisms inthis
institutional context. Second, the signi?cance of ?rmperformance variables implies that
the ?nancial condition of a ?rm dominates the decision to engage in RPTs for smaller,
high-risk ?rms like CTEs. Finally, the requirement that CTEdisclose RPTs as line items
in QCF reports represents relevant information for users to monitor transactions that
Cash-based
related party
transactions
163
D
o
w
n
l
o
a
d
e
d

b
y

P
O
N
D
I
C
H
E
R
R
Y

U
N
I
V
E
R
S
I
T
Y

A
t

2
1
:
0
6

2
4

J
a
n
u
a
r
y

2
0
1
6

(
P
T
)
may not be in the best interests of shareholders. Extending such disclosures to all
periodic cash ?ow reports warrants further consideration by regulators.
Notes
1. AASB, 2005 Related Party Disclosures is the Australian equivalent to the international
accounting standard, IAS 24 Related Party Disclosures. The relevant US accounting standard
is FASB Statement No. 57 Related Party Disclosures.
2. See also “US companies rise to top of corporate governance table”, Financial Times, 7/9/04,
page 23.
3. In particular, ASX Listing Rule 1.3.2(b).
4. For example, NASDAQ in the U.S. and AIMin the UK both cater for smaller listings than the
New York Stock Exchange and the London Stock Exchange, respectively.
5. AASB 107 Cash Flow Statements is equivalent to the international accounting standard, IAS
7 Cash Flow Statements.
6. Other required disclosures are details of non-cash ?nancing and investing activities, and a
description of acquisitions and disposals of business entities.
7. This difference makes it dif?cult to reconcile the related party disclosures in 4C Reports and
the disclosures made in annual ?nancial reports.
8. Many CTEs fall outside the top 500 companies by market capitalisation. They are therefore
not required to have an audit committee (ASX Listing Rule 12.7).
9. Under Listing Rule 4.7B(d), the ASX has discretion, on a case by case basis, to require
non-CTE ?rms to lodge 4C QCF reports “where quarterly reporting is considered to be
warranted to supplement the entity’s continuous disclosure in relation [to] its ?nancial
position” (ASX, 2002, p. 4). This requirement is principally to facilitate close monitoring of
?rms that are encountering operating issues such as liquidity problems.
10. If a listed entity makes a signi?cant change to the nature or scale of its activities the ASX has
the discretion, under Listing Rule 11.1.3, to treat it as if it were “reapplying” for admission.
This would include the application of Listing Rule 1.3.2(b), which relates to entities with
more than half of their tangible assets in cash (CTEs).
11. Of the total observations, 355 (9.3 per cent) in Model 1 and 3710 (88.9 per cent) in Model 2,
have a value of zero.
12. Extreme observations were winsorised by no more than ?ve percent of the total sample (see
Tabachnick and Fidell, 2007).
13. Unadjusted t-statistics are reported, as results of White’s (1980) test indicate the regression
results are not affected by heteroscedasticity.
References
Asthana, S.C. and Zhang, Y. (2006), “Effect of R&D investments on persistence of abnormal
earnings”, Review of Accounting & Finance, Vol. 5 No. 2, p. 124.
Australian Accounting Standards Board (2005), AASB 124 Related Party Disclosures, Australian
Accounting Standards Board available at: www.aasb.com.au/admin/?le/content102/c3/
AASB124_12-05.pdf
Australian Accounting Standards Board (2007), AASB 107 Cash Flow Statements, Australian
Accounting Standards Board available at: www.aasb.com.au/admin/?le/content102/c3/
AASB107_07-04_COMPjul07_07-07.pdf
ARJ
21,2
164
D
o
w
n
l
o
a
d
e
d

b
y

P
O
N
D
I
C
H
E
R
R
Y

U
N
I
V
E
R
S
I
T
Y

A
t

2
1
:
0
6

2
4

J
a
n
u
a
r
y

2
0
1
6

(
P
T
)
Australian Securities Exchange (2002), Guidance Note 23: Appendix 4C, Australian Securities
Exchange available at: www.asx.com.au/ListingRules/guidance/gn23_appendix_4c.pdf
Australian Securities Exchange (2003), Principles of Good Corporate Governance and Best
Practice Recommendations, Australian Securities Exchange available at: ww.shareholder.
com/visitors/dynamicdoc/document.cfm?documentid ¼ 364&companyid ¼ ASX
Chan, L.K.C., Lakonishok, J. and Sougiannis, T. (2001), “The stock market valuation of research
and development expenditures”, Journal of Finance, Vol. 56 No. 6, p. 2431.
Chhaochharia, V. and Grinstein, Y. (2007), “Corporate governance and ?rm value: the impact of
the 2002 governance rules”, The Journal of Finance, Vol. 62 No. 4, pp. 1789-825.
Davidson, R., Goodwin-Stewart, J. and Kent, P. (2005), “Internal governance structures and
earnings management”, Accounting & Finance, Vol. 45 No. 2, pp. 241-67.
DeAngelo, L.E. (1981), “Auditor size and audit quality”, Journal of Accounting and Economics,
Vol. 3 No. 3, pp. 183-99.
Dechow, P.M., Sloan, R.G. and Sweeney, A.P. (1996), “Causes and consequences of earnings
manipulations: an analysis of ?rms subject to enforcement actions by the SEC”,
Contemporary Accounting Research, Vol. 13 No. 1, p. 1.
Easterbrook, F. (1984), “Two agency-cost explanations of dividends”, The American Economic
Review, Vol. 74, pp. 650-9.
Fargher, N. and Woo, L. (2002), “Increased disclosure as an alternative to direct regulation of
listing quality”, working paper, University of New South Wales, Sydney/Bond University,
Gold Coast.
Ferguson, A. and Matolcsy, Z. (2003), “Audit quality and post earnings announcement drift”,
Asia-Paci?c Journal of Accounting and Economics, Vol. 11 No. 2, pp. 121-37.
Foster, G. (1986), Financial Statement Analysis, 2nd ed., Prentice-Hall, Englewood Cliffs, NJ.
Gallery, G., Gallery, N. and Sidhu, B.K. (2004), “Quarterly cash ?ow reporting – is it useful?”,
JASSA, Vol. 3, pp. 14-18.
Gillan, S.L. (2006), “Recent developments in corporate governance: an overview”, Journal of
Corporate Finance, Vol. 12, pp. 381-402.
Gordon, E.A., Henry, E. and Palia, D. (2004a), “Related party transactions and corporate
governance”, Advances in Financial Economics, Vol. 9, pp. 1-27.
Gordon, E.A., Henry, D. and Palia, D. (2004b), “Related party transactions: associations with
corporate governance and ?rm value”, EFA 2004 Maastricht Meetings Paper No. 4377,
available at SSRN:http://ssrn.com/abstract ¼ 558983 or DOI: 10.2139/ssrn.558983.
Goyal, V.K. and Park, C.W. (2002), “Board leadership structure and CEO turnover”, Journal of
Corporate Finance, Vol. 8 No. 1, pp. 49-66.
Greene, W.H. (2000), Econometric Analysis, 4th ed., Prentice Hall, Englewood Cliffs, NJ.
Hamilton, K. (2004), “Accountability without compromise: embracing the philosophy of the ASX
best practice recommendations”, Corporate Law Masterclass, Brisbane, available at: www.
asx.com.au/about/pdf/CorporateLawMasterclassQldKH.pdf
Institutional Analysis (2002), A Report on Corporate Governance at Five Companies that
Collapsed in 2001– Executive Summary, available at:http://cclsr.law.unimelb.edu.au/
bulletins/archive/Bulletin0060.htm#(G)corporategovernanceat?ve
Jensen, M.C. (1986), “Agency cost of free cash ?ow, corporate ?nance and takeovers”, The
American Economic Review, Vol. 76, pp. 323-9.
Jensen, M.C. (1993), “The modern industrial revolution, exit, and the failure of internal control
systems”, The Journal of Finance, Vol. 48 No. 3, pp. 831-80.
Cash-based
related party
transactions
165
D
o
w
n
l
o
a
d
e
d

b
y

P
O
N
D
I
C
H
E
R
R
Y

U
N
I
V
E
R
S
I
T
Y

A
t

2
1
:
0
6

2
4

J
a
n
u
a
r
y

2
0
1
6

(
P
T
)
Klein, A. (2002), “Audit committee, board of director characteristics, and earnings management”,
Journal of Accounting & Economics, Vol. 33 No. 3, p. 375.
Klein, A. and Mohanram, P.S. (2005), “Why did so many poor-performing ?rms come to market
in the late 1990s?: Nasdaq listing standards and the bubble”, working paper, available at:http://ssrn.com/paper ¼ 680667
Kohlbeck, M.J. and Mayhew, B.W. (2004), Related Party Transactions, AAA 2005 FARS Meeting
Paper, available at SSRN:http://ssrn.com/abstract ¼ 591285
Lev, B. and Sougiannis, T. (1996), “The capitalization, amortization, and value-relevance of
R&D”, Journal of Accounting and Economics, Vol. 21 No. 1, pp. 107-38.
Linck, J.S., Netter, J.M. and Yang, T. (2006), Effects and unintended consequences of the
Sarbanes-Oxley Act on corporate boards, AFA 2006 Boston Meetings Paper, available at
SSRN:http://ssrn.com/abstract ¼ 902665 or DOI: 10.2139/ssrn.687496.
Myers, S.C. and Rajan, R.G. (1998), “The paradox of liquidity”, Quarterly Journal of Economics,
Vol. 113 No. 3, pp. 733-71.
Peasnell, K.V., Pope, P.F. and Young, S. (2005), “Board monitoring and earnings management: do
outside directors in?uence abnormal accruals?”, Journal of Business Finance &
Accounting, Vol. 32 Nos 7/8, pp. 1311-46.
Romano, R. (2004), “The Sarbanes-Oxley Act and the making of quack corporate governance”,
NYU, Law and Econ Research Paper 04-032; Yale Law & Econ Research Paper 297; Yale
ICF Working Paper 04-37; ECGI – Finance Working Paper 52/2004, available at SSRN:http://ssrn.com/abstract ¼ 596101 or DOI: 10.2139/ssrn.596101.
Rosenstein, S. and Wyatt, J.G. (1990), “Outside directors, board independence, and shareholder
wealth”, Journal of Financial Economics, Vol. 26 No. 2, pp. 175-91.
Tabachnick, B.G. and Fidell, L.S. (2007), Using Multivariate Statistics, International 5th ed.,
Pearson, Boston, MA.
Teoh, S.H. and Wong, T.J. (1993), “Perceived auditor quality and the earnings response
coef?cient”, Accounting Review, Vol. 68 No. 2, pp. 346-66.
White, H. (1980), “A heteroskedasticity-consistent covariance matrix estimator and a direct test
for heteroskedasticity”, Econometrica, Vol. 48 No. 4, p. 817.
Willenborg, M. (1999), “Empirical analysis of the economic demand for auditing in the initial
public offerings market”, Journal of Accounting Research, Vol. 37 No. 1, pp. 225-38.
Xie, B., Davidson, W.N. and DaDalt, P.J. (2003), “Earnings management and corporate
governance: the role of the board and the audit committee”, Journal of Corporate Finance,
Vol. 9 No. 3, p. 295.
Further reading
Australian Securities Exchange (n.d.), ASX Listing Rules, Australian Securities Exchange
available at: www.asx.com.au/supervision/rules_guidance/listing_rules1.htm
Corresponding author
Natalie Gallery can be contacted at: [email protected]
ARJ
21,2
166
To purchase reprints of this article please e-mail: [email protected]
Or visit our web site for further details: www.emeraldinsight.com/reprints
D
o
w
n
l
o
a
d
e
d

b
y

P
O
N
D
I
C
H
E
R
R
Y

U
N
I
V
E
R
S
I
T
Y

A
t

2
1
:
0
6

2
4

J
a
n
u
a
r
y

2
0
1
6

(
P
T
)
This article has been cited by:
1. Effiezal Aswadi Abdul Wahab, Hasnah Haron, Char Lee Lok, Sofri YahyaDoes Corporate Governance
Matter? Evidence from Related Party Transactions in Malaysia 131-164. [Abstract] [Full Text] [PDF]
[PDF]
D
o
w
n
l
o
a
d
e
d

b
y

P
O
N
D
I
C
H
E
R
R
Y

U
N
I
V
E
R
S
I
T
Y

A
t

2
1
:
0
6

2
4

J
a
n
u
a
r
y

2
0
1
6

(
P
T
)

doc_562861884.pdf