Stock Price Reactions to Announcements of Related Party Transactions*

Abstract

reactions in response to investment announcements made by firms listed
on the Indonesian Stock Exchange (JSX) depend on 1) the nature of relation
between transacting parties (Related Party Transaction (RPT) or Non-
Related Party Transaction (Non-RPT)); and 2) the type of firms (part of
group affiliation or not). This study constitutes an event study, i.e., to
examine cumulative abnormal returns (CAR) surrounding the date of
investment announcements. The study finds that the stock price reaction
(as measured by CAR) for RPT is lower than that for Non-RPT. Therefore,
the market perceives that RPT is subject to wealth expropriation by
controlling shareholders to minority shareholders, and that this perception
is eventually reflected in the relatively lower market reaction. Further, the
study finds (albeit weak) that the stock market reaction for firms in group
affiliations is lower than for those in non-group affiliations. Under the
condition of inadequate supervision and ineffective law enforcement, firms
in group affiliations can easily conduct expropriation without being
concerned about being detected by the regulator.
Keywords: Group Affiliation, Investment Decision, Minority Shareholders,
Related Party Transaction, Wealth expropriation