Effect of corporate governance factors and MSWG activism on cumulative abnormal returns induced by related party transaction

This is an event study that examines the effects of related party transaction (RPT) and corporate
governance factors in a firm's daily cumulative abnormal return of the stock price (CAR), using
a sample of 422 RPTs engaged by 286 listed firms in the Main Market of Bursa Malaysia from 2008 to 2013. Univariate analysis (t-test) is used to determine the RPT's announcement effect on
CAR in the short horizon window, and ordinary least squares (OLS) and logistic regression are
employed to investigate the relationships between the W sCA R and exogenous variables of
RPT types and size, Minority Shareholder Watchdog Group (MSWG) activism, and corporate
governance factors. The univariate result shows significant negative effects on CAR in the postannouncement
of RPT, indicating governance discount of stock prices by the market in realizing
the occurrence of expropriation, in particular asset acquisition and cash-payment types of RPT.
The regression results show that cash ownership of the dominant owner and the divergence of
control to cash right for the dominant owner and the directors have a significant negative
relationship with CAR. This contributes to extant researches in emerging markets with findings
that the problems of expropriation are mainly attributed to circumstances of high dominant
family ownerships, which is further exacerbated by the entrenchment of the controlling
shareholders and directors. This study also adds to the literature by showing evidence that
MSWG activism, which results in higher fm's disclosure quality, has a significant positive
effect on CAR in mitigating the expropriating behaviour of the controlling shareholders.
Furthermore, the significant positive relationship between board independence and CAR also
reinforces previous research findings that increasing the independence of the board enhances its
effectiveness as an advocate for minority shareholders' interest. Finally, clear evidence was
found that participation of the state's block holders or public investment fund contributes
positively to the deterrence of expropriation by the dominant owner.