Discriminatory Related Party Transactions and Corporate Governance Reform Evidence from Bangladesh A thesis submitted in fulfilment of the requirement for the degree of Doctor of Philosophy Mohammad T[.]
Discriminatory Related Party Transactions and Corporate Governance Reform: Evidence from Bangladesh A thesis submitted in fulfilment of the requirement for the degree of Doctor of Philosophy Mohammad Tareq MBA (University of Tsukuba, Japan) MBA (University of Dhaka, Bangladesh) BBA (Honours) (University of Dhaka, Bangladesh) School of Accounting RMIT University 2013 DECLARATION I certify that except where due acknowledgement has been made, this thesis is sole done by me and has not been submitted previously, in whole or in part, to qualify for any other academic award The content of this thesis is the result of research which has been carried out since the official commencement date of my PhD programme Mohammad Tareq Date: 24.11.2003 TABLE OF CONTENT Page No LIST OF TABLES LIST OF FIGURES ACKNOWLEDGEMENT ABSTRACT IV VII VIII IX CHAPTER 1: INTRODUCTION 1.1 Introduction 1.2 Objective and Significance of the Study 1.3 Motivation of the Study 1.4 Thesis Structure CHAPTER 2: LITERATURE REVIEW: REFORM AND DRPTS 2.1 Introduction 2.2 Corporate Governance Reform 2.2.1 Reform around the World 2.2.2 Reform 2006 in Bangladesh 2.2.3 Background of the Reform 2006 2.2.4 Decoupling in Reform Compliance 2.3 Discriminatory Related Party Transactions 2.3.1 Different DRPTs for Private Benefit 2.3.2 Other techniques for private benefits by controlling shareholders 2.3.3 Conditions that Motivate DRPTs 2.3.4 Safeguards for DRPTs in Corporate Governance Reform 2.3.5 Legal system and minority shareholders protection from DRPTs 2.3.6 Legal enforcement and DRPTs 2.4 Measurement of DRPTs 2.4.1 Current DRPTs Measures 2.4.2 Limitation of the Current DRPTs Measurements 2.5 Conclusion CHAPTER 3: THEORETICAL FRAMEWORK, RESEARCH QUESTIONS AND MODEL SPECIFICATION 3.1 Theoretical Framework for the Research 3.2 Development of the Research Questions 3.3 Model Specification I 10 11 11 15 18 19 24 24 28 30 33 45 48 52 52 56 58 59 66 69 CHAPTER 4: METHODOLOGY 4.1 Quantitative Methods 4.1.1Sample selection and source of quantitative data 4.1.2 Methods for Quantitative Data Analysis 4.1.2.1 Fixed versus Random Effect Estimation Method 4.1.2.2 Growth Curve Modelling 4.2 Qualitative Methodology 4.2.1 Interview Procedure 4.2.2 Sampling Method 4.2.3 Sample Size 4.3 Measurement of Variables 76 76 77 77 80 82 83 84 84 85 CHAPTER 5: A NEW MEASUREMENT FOR DRPTS 5.1 Introduction 5.2 The New DRPT Measurement Model 5.3 Methodology of Empirically Testing the DRPT Measurement Model 5.3.1 Data Selection 5.3.2 Design of Performance Tests for the New and the existing DRPT Measurement 5.3.3 Measurement of Variables in the New DRPT Model 5.4 Results of the Model’s Performance Tests 5.4.1 Descriptive Statistics 5.4.2 Type and Type (power) Error Rates of the Measures 5.4.3 Further evidence: DRPTs Sensitivity on Firms Market Value 5.5 Conclusion 87 88 91 91 92 95 97 97 101 105 109 CHAPTER 6: FINDINGS: EVALUATION OF THE REFORM 2006 FROM DRPTS PERSPECTIVE 6.1 Introduction 6.2 Quantitative Analysis and Result 6.2.1 Descriptive Statistic 6.2.2 Correlation Analysis 6.2.3 Panel Data Regression Analysis 6.2.4 Growth Curve Modelling (GCM) Result 111 112 112 117 119 123 6.3 Qualitative Research Finding 6.3.1 Demographic Information on the Interview Participants 125 125 II 6.3.2 Independence of Independent Directors in Bangladesh 6.3.3 Audit Committee Competence 6.3.4 DRPTs Approval in Bangladeshi Companies 6.3.5 The Stance of the Board’s Chair 6.3.6 Disparity in Governance among Companies 6.3.7 Improvement in the effectiveness of safeguards CHAPTER 7: CONCLUSION 7.1 Overview and Summary of Findings 7.2 Contribution to the Literature 7.3 Implications of the Findings 7.4 Limitations 7.5 Future research Direction 127 129 131 133 134 136 139 141 143 145 147 APPENDIX 148 REFERENCES 187 III LIST OF TABLES Page No Table 2.1: Corporate governance reform around the world (2005-2010) 14 Table 2.2: Salient research on decoupling in reform compliance 22 Table 2.3 Summary of salient research on different types of DRPTs 26 Table 2.4: Summary of corporate governance safeguards for DRPTs research 44 Table 2.5 Salient research on legal enforcement and minority shareholders protection 50 Table 2.6 Summary of current DRPT measures 54 Table 3.1: Minority shareholder protection from DRPTs in Bangladeshi law 64 Table 5.1: Sample companies by industry classifications 98 Table 5.2: Summary statistics of the variables 99 Table 5.3: Type and Type error (power) of the new and total RPT based measurement 103 Table 5.4: Type and Type error result of the new and total RPT based measurement for financial companies and non-financial companies 104 Table 5.5: Sensitivity of DRPT on share price: panel data regression results 108 IV Table 6.1: Descriptive statistics of the sample firms 114 Table 6.2: Correlation matrix of variables of the study 118 Table 6.3: Regression results for effect of reform 2006 factors on the level of DRPTs 120 Table 6.4: GCM result for effect of reform 2006 factors on the level of DRPTs 124 Table 6.5: Professional background of participants 126 Table 6.6: Professional background of non-independent directors 126 Table 6.7: Professional background of independent directors 127 Table 6.8: Educational background of independent directors 127 Table 6.9: Audit committee competence 131 V LIST OF FIGURES Page No Figure 2.1: Control by crossholding of share 31 Figure 2.2: Control by pyramidal ownership 32 Figure 3.1: Description of Williamson’s Market and Hierarchy model applied to the changes in Bangladeshi corporate governance 62 Figure 5.1: Conditions for asset appropriation by related party transactions 89 Figure 5.2: Total RPT and DRPT over the sample period 2002 to 2009 100 Figure 5.3: The new measure of DRPTs and share price: company-by-company plots 106 Figure 5.4: Total RPTs and share price: company-by-company plots 107 Graph 6.1: Board sizes of the sample companies 115 Graph 6.2: Number of independent director in the sample companies 115 VI ACKNOWLEDGEMENTS I would like to express my deep gratitude to my principal supervisor, Professor Dennis Taylor, who has prudently guided and supported me for doing this research He has been an unwaveringly dedicated advisor and meticulous reader of the manuscript, without whose encouragement and support, I might never this work I would like to express my gratitude to my second supervisor, Professor Clive Morley for his valuable comments and advice on this research Moreover, I would like to express my gratitude to Professor Sheila Bellamy for her valuable comments on this research I would like to thank her for giving me encouragement for doing this research I also thank all of my fellow doctoral students and staff at the School of Accounting at RMIT University Finally, I thank my lovely wife, Sejuti and my parent for their encouragement for my study and research VII ABSTRACT Discriminatory related party transactions (DRPTs) are non-arm’s length transactions with related parties of controlling shareholders for private benefit at the cost of other shareholders This is a governance issue between controlling shareholders and minority shareholders in both developed and developing countries However, most studies on DRPTs are in developed countries with the few exceptions of studies in China, India and Mexico In 2006, listed companies in Bangladesh were subjected to corporate governance reforms through the SEC/CMRRCD/2006-158/Admin/02-08 order issued by the Securities and Exchange Commission of Bangladesh The reforms have potential to curb DRPTs However, prior studies on the effectiveness of corporate governance reform in protecting minority shareholders from DRPTs in a developing country have been limited The few evaluations undertaken in China and India have been narrowly focused Therefore, this area of literature is open to further development Moreover, there has been limited systematic effort to develop a sound measures for such discriminatory transactions at the company level One notable measure is the Anti-self Dealing Index which is a comprehensive index to measure DRPTs at the country level At the company level, several researchers simply use total dollar amount of RPTs as a proxy for DRPTs Alternatively, some other researchers use selected RPTs or some derivatives of related party transactions as a measure of DRPT However, all of these company level measures are based on weak theoretical underpinnings and therefore prone to high measurement error VIII ... and validation of an improved measure of DRPTs, and the establishing of evidence on the degree of effectiveness of corporate governance reforms for controlling DRPTs in an emerging economy, Bangladesh. .. on corporate governance reform and DRPTs This chapter focuses mainly on literature from three topic areas: corporate governance reform, the phenomenon of tunnelling and RPTs, and measurement of. .. Azim and Rahman 2008), none of these prior studies focus on the 2006 corporate governance reforms In his study of the 2006 reforms, Siddiqui (2010) questions the suitability of the reforms in Bangladesh,