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CHAPTER 11 Stock Research Checklist—Mana... > Does the Company Have Related-Party ...

Does the Company Have Related-Party Transactions with the Family Members or Relatives of the Senior Management or Board of Directors?

You need to take time to review at least three or four years of annual reports in order to research any related-party transactions. If the company is doing business with any of the company’s senior management or relatives who are involved in other companies, you need to avoid this company. Whenever relative companies act as suppliers, they are likely paid top dollar for their products or services. That will affect the profit margin of the company, and in turn, decrease the share price of the stock.

You need to compare at least three or four years of annual reports and research the number of pages allocated to related-party transactions. If the number of pages is increasing every year, be cautious. You need to dig farther in order to fully understand the situation. Companies as gigantic as Enron have collapsed in large part due to related-party transactions.


  

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