A business deal or /
arrangement between 2 parties who are joined by a special relationship prior to
the deal.
For example, a
business transaction between a major shareholder & the corporation, like a
contract for the shareholder's company to perform renovations to the
corporation's offices, would be deemed a related-party transaction.
Related-party
transactions (RPTs) refer to transactions between a company and its related
entities such as subsidiaries, associates, joint ventures, substantial
shareholders, executives, directors and their relatives, or entities owned or
controlled by its executives, directors, and their families. RPTs are
widespread and are part of every business group activity.
RPTs have come under
close scrutiny in recent years as they have been misused by companies as revealed
in various corporate scandals. The study analyses Indian companies for 3 years
between 2009 and 2011 and finds that RPTs were widespread and present in almost
all companies during this period.
Further, firms with
high RPTs related to sales and income were found to report lower performance
compared to companies with low RPTs. While ownership structure failed to offer
any explanation for the magnitude of RPTs, RPTs were found to be lower in
companies where big audit firms were statutory auditors.
Src: IIMB
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