Usefulness and Effectiveness of Related Party Transactions (RPTs) Disclosure: Empirical Evidence From Italy

Related party transactions (RPTs) can be used by corporate insiders (e.g., managers, controlling shareholders) to expropriate corporate outsiders (e.g., minority shareholders). We argue that effective disclosure of RPTs can eliminate or at least reduce expropriation phenomena by letting corporate outsiders assess the fairness of the transactions and identify the underlying conflicts of interest. We consider a sample of large RPTs carried out by listed corporations in Italy, a country that has been affected by significant corporate scandals in recent years. In particular, we analyse the content of several compulsory informative documents, required by CONSOB (the Italian Securities and Exchange Commission), concerning large RPTs. The focus of our content analysis is on the “warnings” sections of these documents that should convey clear and comprehensive information on potential risks and conflicts of interest. Our empirical results show that, while the “warnings” sections of the studied documents generally contain all the information required by existing rules, the depth of the information provided is often unlikely to be sufficient to communicate the implications of the RPTs. Thus, readers may not find the disclosed information adequate to evaluate the fairness of the transactions. Moreover, visual representations are rarely used in the informative documents. The use of such representations could allow companies to convey the structures and features of complex RPTs in a simpler and more direct way.