Stock price reactions to announcements of related party transactions

The primary objective of this study is to investigate whether stock price 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.