Related Party Transactions: Legal Strategies and Associations with Corporate Governance and Firm Value in Brazil

Abstract

Related Party Transactions (RPTs) are operations with high potential for conflict of interests between shareholders and managers or between controlling and minority shareholders. In environments characterized by concentrated ownership structures, such as in Brazilian, such transactions could be used as a way for reaping private benefits of control by controlling shareholders. This paper undertakes this issue from both legal and empirical point of view. On the legal side, we survey the legal strategies currently employed in Brazil by regulators and self-regulatory bodies aiming at to avoid the problems from the inherently conflict of interests present in such dealings. On the empirical side, we analyze the RPTs reported by all Brazilian companies listed at Bovespa's corporate governance special listing segments in 2006. We also analyze the relation between the use of RPTs and proxies for corporate governance quality, as well as the relation between RPTs and firm market value. As the main qualitative result from our legal survey, we observe that Brazilian legal system makes use of two main legal strategies: definition of expected standards with ex-post analysis, and mandatory disclosure of relevant RPTs. From our quantitative analyses, three results stand out: RPTs are significant and frequent among Brazilian listed companies, there's a negative association between the use of RPTs and corporate governance quality, and there's a negative association between RPTs and firm market value. Overall, the empirical results provide evidence that RPTs are a signal for conflicts of interests taking place, rather than efficient business transactions.