Regulation and Self-Regulation of Related Party Transactions in Italy. An Empirical Analysis (original) (raw)
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Nearly 86% of listed Italian companies now claim to be in formal compliance with the provisions of the Italian Corporate Governance Code, which, like many codes in EU countries, give companies the option to either comply or explain their decision not to do so. But in the wake of the recent financial crisis, the effectiveness of such self-regulatory corporate governance codes has been subjected to increasing skepticism. In particular, critics wonder whether such governance codes actually encourage the adoption of best practices and promote better governance.This article presents a governance indicator (CoRe) devised by the authors that attempts to assess the actual, or effective, levels of compliance with the Italian Corporate Governance Code in terms of listed companies' procedures for dealing with related party transactions (RPTs). The authors report that the companies' level of effective compliance with regard to RPTs is considerably lower than their publicly reported levels of formal compliance. The authors also report that higher levels of effective compliance tend to be found in companies where (1) minority shareholders have appointed one or more directors; (2) independent directors serve on important committees; and (3) there are significant holdings by institutional investors—particularly foreign investors—who participate in general shareholder meetings.
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Regarding the development of sustainable governance systems, many regulators have issued and developed self-regulatory codes defining the characteristics and ideal features of government models. The adoption of codes of good governance could serve as a mechanism to increase the level of legal protection for minority shareholders. Thus, this paper aims to measure the effective compliance by Italian listed companies with the Italian Code's recommendations on related party transactions and to assess the level of legal protection for minority shareholders in the Italian stock market. Using a quantitative method, our findings suggest that FTSE MIB companies are effectively compliant and that public utilities companies are as well. We also carried out an ordinary least squares (OLS) regression and found that companies with a higher market value and a greater presence of independent and non-executive directors assure a higher level of compliance. We observed that widely held firms have a positive effect on the level of legal protection for the minority shareholders. Our paper contributes to enriching the sustainable governance models, and it is directed to academic and practical communities.
2009
This study is aimed at offering an overview on how the recent reforms in corporate law have affected Italian listed companies. The main focus is to show whether such laws (TUF, law on savings, and its amending decree) represent either an asset, or a burden on the companies. This recent season of reform has resulted in creating a great difference in the regulation of non listed companies and listed ones. It has also generated a substantial asymmetry between ordinary stock companies and listed companies, with regards to the appointment system of directors, and the composition of the board of auditors. Insight is provided regarding how, specifically, the management system was affected by the new provisions. Finally the documents and audit control of the legal organisational statute of public companies is taken into scrutiny.
Italian Corporate Governance in the Last 15 Years: From Pyramids to Coalitions?
SSRN Electronic Journal, 2006
Between 1990 and 2005 the Italian legal and economic framework relating to financial markets experienced major developments (a new Banking Law was passed, institutional investors' role increased in financial markets, the stock market was privatized, a securities law was enacted, a corporate governance code was introduced and then twice revised; a new company law has been enacted; the "law on savings" has further strengthened shareholders' protection). All these changes should have deeply affected the governance structure of Italian companies. We provide an in-depth (descriptive) analysis of the evolution of both unlisted and listed corporate governance over the period, with the aim of evaluating the effect of the reforms in the light of the recent theoretical developments. We find limited changes in the ownership and control structures of unlisted firms and listed companies. At the same time there is no substantial increase in the access to stock market. For both listed and unlisted companies we observe some changes in the instruments used to ensure stability of control. In unlisted companies the aim is pursued through an increasing use of by-laws clauses that restrict the transferability of shares; in listed companies the objective was reached in the past through an extensive use of pyramids, more recently by establishing shareholders' coalitions of various nature, with an increasing relevance of bank-firm relationships. This evidence shows that no radical change occurred; this suggests on the one side, that it might still be necessary to further strengthen shareholders' protection; on the other side, that the unwillingness of owners to release control is central in understanding the limited separation between ownership and control in Italy. The role of coalitions and the nature of the bank-firm relationships seem to be the main issues for both regulatory and market developments.
Open Journal of Accounting, 2014
Related party transactions (RPTs) can have a dual nature. On one hand, these transactions may be considered sound business exchanges, fulfilling the economic needs of the company. On the other hand, RPTs may be considered a mechanism to exploit company resources as a consequence of existing conflicting interests. This study takes into account both aspects. Specifically, this paper investigates the relation between RPTs and companies' financial performance, and thus verifies whether there is an association between these kinds of transactions and earnings management. This study examines the existence of this relation as regards the universe of Italian listed companies for the period of 2008-2011. According to the related data analysis, the research concludes that related party transactions and companies' financial performance results are not correlated and that there is no evidence of a cause-effect relation. Therefore, related party transactions do not appear-thanks also to the existence of control mechanisms-a means used by Italian listed companies to realize earnings management, especially earnings smoothing.
Non-Voting Shares and the Value of Control: The Impact of Corporate Regulation in Italy
SSRN Electronic Journal, 2003
Researchers have recently devoted their attention to the relationship between corporate and securities laws and the development of stock markets, claiming that high quality regulation, by reducing private benefits of control, stimulates broader and deeper capital markets. This paper tries to assess the impact of changes in Italian corporate law on private benefits during the twelve-year period 1989-2000. In this period, the Italian legislator introduced the mandatory bid rule (law 149/1992) and moved towards a higher protection of minority shareholders (through the legislative decree 58/1998). The paper focuses on these regulatory changes by analysing the evolution of the so-called voting premium, i.e. the price differential between voting and non-voting stocks, which might be regarded as a good proxy of private benefits of control. The analysis involves 80 publicly traded firms and supports the hypothesis that, along with the company's ownership structure, the liquidity and the fiscal treatment of non voting stocks as well as market factors (such as interest rates and traded volumes), the institutional framework matters. In particular, the estimation results show that the voting premium increased by about 2 percentage points after the introduction of the mandatory bid rule in 1992 and drop by about 7 percentage points following the enactment of the new corporate governance rules in 1998. The behaviour of voting and non-voting share prices during the period is thus consistent with the hypothesis that expropriation of minority shareholders decreased after 1998. JEL Classification: G30, G32, G34, K22
Research Question/Issue: This paper describes the logic that guides the implementation of corporate governance reforms and investigates the extent to which the logic leads to an increase in investor protection.We use the example of Italy, where major governance reforms were passed in 1998 to protect minority shareholders from the risk of expropriation. Research Findings/Insights: Our two-stage mixed-methods longitudinal study (1995–2005) reveals that the reforms were only modestly effective in improving governance practices. On the one hand, we document a greater alignment of cash flow rights and voting rights of ultimate owners after 1998, suggesting that minority shareholders face lower risk of expropriation. Yet, on the other hand, we find that the percentage of firms where control is fully contestable continues to remain low. Our qualitative analysis reveals both facilitators such as institutional investor activism and mandatory provisions, and impediments such as discretionary provisions, weak enforcement, and an ingrained culture of high control. Theoretical/Academic Implications: This study elaborates extant theory on the effectiveness of reforms by adopting a longitudinal design that describes both their underlying logic and their actual effects on business practices. It also offers conceptual clarity to this literature by bringing attention to factors that act as facilitators and impediments to reform efforts. Practitioner/Policy Implications: This study prompts lawmakers in countries endeavoring reforms to encourage partici- pation of institutional investors, as also urges them to consider mandatory provisions, especially those which enhance disclosure and representation.
SSRN Electronic Journal
This paper investigates the effect of corporate governance reforms on the balance between ownership and control in a country characterized by poor investor protection. We use the example of Italy, where major reforms were passed in 1998 to protect minority shareholders from the risks of expropriation on account of the exercise of high voting rights (or high control) by the ultimate owner despite low cash flow rights (or low ownership). Using a two-stage longitudinal research design incorporating both quantitative and qualitative analyses (1995-2005), we find that reforms led to improved disclosure and greater representation of minority shareholders. In turn, this led to a decline in the risk of expropriation of minority shareholders. The reforms had a greater effect on firms where an institutional investor was present. We also find that while reforms led to an increase in the cash flow rights of the ultimate owner, they did not lead to a decrease in voting rights. This paper highlig...
The evolution of ownership and control structure in Italy in the last 15 years
2008
In the paper we document the evolution of Italian listed companies governance since 1990 under two respects: a) their governance structure and b) some measures of good governance, in order to verify whether some changes are detectable as a consequence of a vast reform process that has taken place over the last 15 years. We find that regarding governance structure, significant changes have taken places firstly with respect to control enhancing mechanisms used by companies: whereas at the beginning of the 90s pyramids, dual class shares and cross-ownership were the most used, in 2007 their importance has substantially reduced with an increase in another control mechanism, the coalitions among shareholders; secondly with reference to a substantially higher presence of institutional investors, mainly foreign. As good governance is concerned, we observe a reduced value of the proxies for control premium, a greater compliance with corporate governance codes, an increased presence of institutional investors at annual shareholders' meetings. However, on the one hand in some cases compliance with codes is still more formal than substantial, on the other foreign institutional investors still participate in Italian shareholders' meetings with a lower frequency than in other countries. The implementation of the shareholders' rights directive (due within 2009) and the introduction of a stricter discipline of related party transactions (to be issued by Consob) might benefit especially the second aspect.