Cash‐based related party transactions in new economy firms

Abstract

Purpose -This paper aims to investigate associations between related party transactions (RPTs) and governance and performance factors of new economy firms. Design/methodology/approach -Previous research has examined the RPTs of large US firms. In contrast, the authors focus on smaller, newly listed Australian firms. Referred to as "commitments test entities" (CTE), these firms are distinguished by the unique Australian Securities Exchange listing requirements applying to them, and associated additional (quarterly cash flow) reporting requirements. Findings -While strong corporate governance characteristics may be expected to constrain the amounts of payments and loans to related parties, we find only weak evidence to support that proposition. The results show that financial condition dominates the decision to engage in RPTs and suggest that external monitoring (associated both with larger firm size and the quarterly reporting phase) are a more effective restraint on the magnitude of RPTs for these high-risk CTE firms.Research limitations/implications -The findings are generally consistent with the "conflict of interest view" proposed by Gordon et al. suggesting RPTs do not serve shareholders' interests. Practical implications -The findings suggest that external monitoring may be a more effective control over RPTs than internal corporate governance mechanisms in this institutional context of small "cashbox" firms. Since RPTs may not be in the best interests of shareholders, extending mandatory RPT disclosures to all periodic cash flow reports warrants further consideration by regulators.Originality/value -This study contributes to the limited research on the effects and implications of RPTs.

Do Managers Reappoint Auditor for Related Party Transactions? Evidence from Selected East Asian Countries

“…Auditors may not be able to efficiently prevent the occurrence of abusive RPTs. This conclusion is consistent with theories and prior studies, including Schmidt and Cross (2014) Gallery et al (2008) and Gul et al (2010) show that Big 4 audit firms play a significant governance role in reducing the number of RPTs and converted RPTs with potentials to become abusive in facilitating efficient transactions. However, these prior findings disregard the existence of close ACR, which may impair auditor independence.…”

“…Another objective of this study is to investigate the association between recurring auditor appointment among Big 4 audit firms and company engagement in RPTs. We extend cross-sectional studies conducted by Gallery et al (2008) and by Gul, Kim, and Qiu (2010), which suggest that Big 4 audit firms can minimize company engagement in RPTs, can reduce numbers of RPTs and transform RPTs with potential for conflict in facilitating efficient transactions. However, we argue that the use of audit firm size (either by Big 4 or non-Big 4 firms) may not sufficiently reflect close relationships found by Gordon et al (2007).…”

“…Cross-sectional differentials of company characteristics include the following: control through company growth (GROWTH), size (SIZE), leverage (LEV), operating risk (RISK) (Ahmed, Hossain & Adams, 2006) and earnings quality (EQ) (Gaio & Raposo 2011). We controlled for audit quality (AudQ) (Gallery et al 2008;Gul et al 2010) and the types of audit opinions (AOPIN) expressed by auditors during a given period. We also controlled for cross-sectional differentials in corporate governance characteristics that may influence company RPT involvement, including board size (BSIZE) (Mohd-Saleh, Iskandar & Rahmat 2005), board independence (BDIND) (Gordon et al 2004), audit committee independence (ACIND), controlling shareholders (CS) (Gordon et al 2004), and types of controlling shareholders (CSF) (Munir et al 2013;Wiwattanakantang 2001).…”

“…Prior studies found mixed evidence to show a prevailing negative impact of close ACR. Instead of auditor's monitoring role in agency conflict as covered in most prior studies (Gallery, Gallery & Supranowicz 2008;Myers, Myers & Omer 2003), this study integrates the close ACR from the networking perspective. Close ACR's literatures e.g.…”

The analysis of Lithuanian payment market: are we stuck to cash?

“…Previous scientific research on the topic of cash payments basically covers the studies on evaluation of contractors' satisfaction with cash payment terms (Odeyinka, Kaka 2005;Gallery et al 2008;Carmichael, Balatbat 2010;Chen 2012;Tran, Carmichael 2012, 2013, peculiarities of cash-in-hand culture (Williams, Windebank 2004;Williams et al 2012;Smith 2014), the impact of cash holdings on investment-cash flow sensitivity (Kim 2014), modelling of payment mechanisms in the construction of a supply chain (Farris II, Hutchinson 2002;Randal, Farris II 2009;Motawa, Kaka 2009) and modification of cash conversion cycle (Talonpoika et al 2014). Nevertheless, the aspects of entities' attachment to one or another method of payment, in particular cash, has hardly been researched in detail.…”