The Relationship of Ownership Structure, Multiple Directorships and Related Party Transactions: Evidence from Two-Tier Corporate Governance System

Abstract

This study investigates the role of internal governance mechanisms in dealing with wealth expropriation via related party transactions. Specifically, this study identify three forms of related party transactions namely related lending, related borrowing and related sales to be exposed against ownership concentration and multiple directorships as part of internal governance mechanisms. Test is conducted using data sets of the firms affiliated to business groups in Indonesia which has unique institutional setting with two-tier cotporate governance system. Multiple directorships and multiple commissionerships are the two independent variables reflecting the dual board governance system in Indonesia. The multiple regression results show that minority ownership is negatively related with three types of related party transactions. The result also finds mixed position of multiple directorships when dealing with related party transactions. Multiple commissionerships that suppose to provide monitoring function fail to gain significant relationship toward all types of transactions. The implication of the finding is that the role of internal governance mechanisms still not really effective in resolving the problem of wealth expropriation in the family business environment with high concentration of ownership