Ownership structure, related-party transactions and firm valuation: evidence from Indian business groups

Submission note: A thesis submitted in total fulfilment of the requirements for the degree of Doctor of Philosophy to the Department of Accounting, Business School, Faculty of Business, Economics and Law, La Trobe University, Bundoora.

The aim of this study is to examine the effect of ownership structure and disclosure of related-party (RP) transactions on firm valuation of group-affiliated firms in India, by using a sample of 317 listed firms comprising 1350 firm-year observations for the period 2008-2012. In particular, the value-relevance models examine the effect of ownership rights on market value of equity (MVE) and valuation effect of RP trading, asset transfer, investment and loan transactions. The empirical results reveal a positive and linear association between direct ownership rights and firm value, whereas there is strong evidence supporting a curvilinear association between indirect ownership rights of controlling shareholders and firm value, suggesting the use of cross-holding and pyramid structures for extracting private benefits. Furthermore, the indirect ownership rights of controlling shareholders possess important explanatory power of RP transactions valuation. RP trading and asset transfer transactions involving group-member firms negatively affect firm value in the presence of indirect ownership rights of controlling shareholders, whereas similar transactions involving subsidiary and holding firms are benign for market valuation. Firms engaged in RP investment and loan transactions with subsidiary and holding firms have significantly lower market valuation. However, indirect ownership rights of controlling shareholders do not influence the earnings-market valuation of these transactions. These findings are robust after controlling for firm-specific attributes, corporate governance and additional sensitivity tests. This is the only study to my knowledge that examines market valuation of RP transactions in the context of India. It contributes to the extant literature by recording distinct valuation of RP transactions involving group-member firms from similar transactions involving subsidiary/holding firms and providing evidence on the role of pyramid structures in understanding the valuation of RP transactions. The findings provide evidence that RP transactions between group-member firms are valued differently from RP transactions involving subsidiary and holding firms. The tunneling incentives of controlling shareholders, measured by indirect ownership rights, influence the valuation of RP transactions relating group-member firms, whereas the nature of transactions affects the valuation of RP transactions between subsidiary and holding firms.