The Market Reaction to Changes in Disclosure of Related-Party Transaction Rules

We examine the valuation effects of the 2004 changes in Romanian related -party transactions (RPT) disclosure rules. Because the rule changes apply only to companies listed on the Bucharest Stock Exchange (BSE), companies traded on an alternative market (RASDAQ) serve as a natural control group. We find that immediately following the adoption of the rules, BSE firms experience abnormal returns of 6% to 12% relative to matched RASDAQ firms with similar pre-reform characteristics. We also show that in the three-year period following the reforms, BSE firms experience a 20-25% increase in their Tobin’s q. Overall, the results suggest that the implementation of mandatory RPT disclosure rules can be effective in decreasing tunneling and increasing minority valuations in an emerging market