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Valuation of firms that disclose related party transactions

Mark Kohlbeck and Brian W. Mayhew

Journal of Accounting and Public Policy, 2010, vol. 29, issue 2, 115-137

Abstract: We examine the stock market's valuation of firms that disclose related party (RP) transactions compared to those that do not. We examine market values just prior to the Sarbanes-Oxley Act (SOX) ban on RP loans to evaluate the market's perception of firms with RP transactions prior to regulatory intervention. We also evaluate subsequent returns to assess the RP firms' overall risk return profile. We use the 2001 S&P 1500 to provide a large yet manageable hand-collected sample that predates SOX. Our market analysis suggests that RP firms have significantly lower valuations and marginally lower subsequent returns than non-RP firms. Market perceptions differ based on partitioning firms by RP transaction type and parties. The results are consistent with the market discounting firms that engage in simple RP transactions.

Keywords: Related; party; transactions; Agency; theory; Contracting; theory; Valuation; Sarbanes-Oxley (search for similar items in EconPapers)
Date: 2010
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