Related party transactions, corporate governance and earnings management

Abstract

Purpose Following the contingency perspective, this paper aims to examine if a good corporate governance structure is able to reduce earnings management made through related party transactions. The authors expect that a high-quality corporate governance influences private benefit acquisition and reduces the positive association between related party transactions and earnings management. Design/methodology/approach A two-stage least squares instrumental variable approach is used to further address endogeneity concerns in this study. The model is organized into three parts: the construction of the corporate governance indicator, the first stage regression to compute the predicted corporate governance indicator and the second stage regression (ordinary least squares multivariate regressions) to analyze the relationship between related party transactions and earnings management. The analysis focuses on a sample of Italian listed companies over the period 2007-2012. Findings The study finds that the interaction between sales-related party transactions and corporate governance is negatively associated with abnormal accruals, signaling that corporate governance quality reduces the positive association between sales-related party transactions and earnings management, consistently with the contingency perspective. Originality/value The research contributes to literature by empirically testing the assumption of contingency perspective. In particular, the results provide new insights to the academic community, underlying that good corporate governance mechanism helps to reduce earnings management behavior through related party transactions.

Mediating Effect of Audit Committee Independence on the Link Between Firms Internal Governance Tunneling from Real Earnings Management

“…A study conducted by Mita & Utama, 2017;Yang, Kweh, & Lin, 2014 documented that related party transactions lead to higher earnings quality. In contrast, other studies reported that related party transactions do not lead to earnings quality in listed non-financial firms by (Gordon & Elaine Hen, 2017;Kim & Yoo, 2017;Marchini, Mazza, & Medioli, 2018;Saleh, Munir, Jaffar, & Yatim, 2013).…”

“…Family affiliation is measured by the percentage of common stock ownership by founding family members (Achleitner et al, 2014;Guo & Ma, 2015;Tian, Yang, & Yu, 2018). Also, related party transactions are measured by the natural logarithm of annual transaction value and were derived from firms' financial reports (Marchini et al, 2018;Shin et al, 2019). The study further used control variables that previously shown to be effective in enhancing the earnings quality.…”

The Disclosure Framework of Related Party Transactions in Selected Asean Member States

“…Secondly, due to the inconsistencies and biases in these theories, Pizzo (2013) suggested adopting a pragmatic approach using the contingency theory. This theory has also been employed by scholars in analysing the relationship between sales and earnings in RPT (Marchini et al, 2018a). Besides, the analysis of the mandatory/enabling theory is needed to justify the rationale of having a minimum standard for corporate law if the market fails to protect the shareholders (Ramsay, 1998).…”

Konsentrasi Kepemilikan, Transaksi Pihak Berelasi, dan Kinerja Perusahaan

“…Ketika transaksi pihak berelasi dimotivasi dengan kepentingan untuk mengambil keuntungan pribadi maka akan merugikan perusahaan atau pemegang saham (Utama & Utama, 2013;Wong et al, 2015). Nilai perusahaan dapat menurun dengan adanya transaksi pihak berelasi yang dimotivasi sebagai sarana untuk oportunisme manajerial, seperti manajemen laba oportunistik, tunneling, dan pengambilan kekayaan dari pemegang saham (Wong et al, 2015;Chen et al, 2017;Marchini et al, 2018).…”