Abstract
Research regards related party transactions (RPTs) and control-ownership divergence (wedge) as expropriation mechanisms manifesting severe agency conflict in emerging markets. Since corporate governance greatly influences firms' investments and strategic behavior, this study examines how different RPTs and the wedge affect cross-border acquisition (CBA) size and returns. In line with agency theory, opportunistic RPTs like loans/guarantees reduce CBA returns. However, operating RPTs are positively related to returns as the market seems to link these RPTs with benefits to firms. The CBA performance of wedge firms varies with RPT types. While loans/guarantees by wedge firms reduce returns due to combined tunneling incentives, operating RPTs impact returns positively, reflecting more economic benefits in wedge firms. The wedge or RPTs are also positively related to CBA size. But increased tunneling incentives restrain wedge firms that give loans/guarantees from large CBAs. Finally, family firms or large group affiliates that provide loans/guarantees or sustain the wedge reduce returns yet make larger CBAs. Overall, agency costs of expropriation mechanisms depend on RPT types and receive further impetus in family firms or group affiliates with extensive intra-group linkages.
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Notes
Srinivasan (2013) explores how RPTs affect ROA and finds no impact except that related party sales reduce ROA.
I avoid the weakest link (Claessens et al. 2000) as the indirect ownership by listed firms is less than 10% in India. Besides, it is a more complicated method to calculate voting right in the presence of cross-holding in group firms.
If the one-step-above listed firm (doesn’t matter it is controlled by another listed group firm) holds x% in my firm and the family directly owns y%, the voting right calculated would be x% + y%; whereas, cash flow right might be less than (x + y)%.
The top seven industries (with two digit national industry classification code of India) with most cross-border acquisitions in the relevant duration are: (a) computer software and related (62), (b) pharma, chemicals, and products (20–22), (c) motors, parts, and equipment (30), (d) electrical, machinery and equipment (26–28), (e) basic metal, and fabricated products (24–25) (f) textiles and fabrics (13), and (g) diversified (98).
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Appendices
Appendix 1
Variables and measurement
Variables | Measurement |
---|---|
CAR | Cumulative standardized abnormal return over the event window (-5, 2); abnormal return for each firm is standardized by dividing the daily return by the square root of its estimated forecast variance |
SCALE | Log of the ratio of cumulative cross-border acquisition sizes in a year over the market capitalization of the acquirer firm |
RPT | The ratio of the annual total value of all related party transactions with all related parties over sales |
ORT | The ratio of purchase/sale of goods/services (receipts and expenditure on revenue account) over sales |
OLG | The ratio of outstanding loans and guarantees with related parties over sales |
Wedge | Equals one when the difference between voting rights and cash flow rights is more than five percent and zero otherwise; voting right is the sum of all direct and indirect votes (i.e., the sum of promoters and persons acting in concert with promoters) held by one-step above parent entities but excludes ownership by other rival families and the government in each firm-year |
FAM | Indicator for a family firm equals one when the firm is a family firm and zero otherwise |
GRP | Indicator for a group equals one when the firm belongs to a group, and zero otherwise |
LGP | Indicator for a large group equals one when the firm belongs to a large group with the number of listed group firms equal to or more than seven |
Cash | Total Cash over total assets |
Tobq | Tobin's q is the ratio of the sum of market cap and the book value of total borrowings over total assets |
Size | Log of total assets of a firm (real) |
Lev | Total debt over total assets |
ROA | EBITDA over total assets |
OPX | Total operating expenses over sales |
ByCash | Indicator equals one for consideration in Cash, zero otherwise |
Rel_Size | The ratio of the size of the cross-border acquisition transaction over the market value |
Industry | Indicator equals one for most active industries associated with cross-border acquisitions, zero otherwise. These industries are (a) computer software, business services, and related activities, (b) pharma, chemicals, and chemical products, (c) motor vehicles and transport equipment, (d) machinery and equipment; and (e) basic metal and fabricated metal products |
Exports | Total exports to sales ratio |
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Saurabh, K. Expropriation mechanisms, corporate governance, and cross-border acquisitions by Indian firms. Int J Discl Gov 20, 395–409 (2023). https://doi.org/10.1057/s41310-023-00183-7
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DOI: https://doi.org/10.1057/s41310-023-00183-7