Related Party Transactions, Family Ownership, and Earnings Management in Indonesia

Abstract

The purpose of earnings management practice is to reach the profit goals the company wants to achieve. Therefore, this study aims to determine the relationship between related party transactions and earnings management in Indonesia by balanced panel data from consumer goods companies listed on the Indonesia Stock Exchange (IDX) from 2017 to 2019. The number of samples used in this study was 102 firm-year observations. The results showed that related party transactions positively and significantly improved corporate earnings management, with discretionary accrual as a proxy. The presence of family ownership strengthens the relationship between related party transactions and earnings management. Also, it shows that the control variable: public accountant from BIG4, company size, company losses, and ROA affect accrual earnings management. The leverage does not affect accrual earnings management. The study result indicates that family business ownership encourages an entrenchment effect that is detrimental to the company. It is carried out through related party transactions then manipulated by using accrual earnings management practices.DOI: 10.26905/jkdp.v25i3.5778

How Do Financial Distress Risk and Related Party Transactions Affect Financial Reporting Quality? Empirical Evidence from Iran

“…When firm management decides to take part in related party transactions to expropriate a firm's resources, then they have motivations for distorting earnings either to justify or increase these perquisites or possibly to mask such expropriation (Gordon and Henry 2005;Marchini et al 2018;Zimon et al 2021;Tarighi et al 2022a). In this regard, many studies have provided evidence that companies have opportunistic behavior and manipulate their profits using RPTs (Healy and Wahlen 1999;Johnson et al 2000;Jian 2003;Thomas et al 2004;Djankov et al 2008;Chen et al 2011b;Rahmat et al 2020;Zimon et al 2021;Subastian et al 2021).…”

“…In general, an enormous body of literature has not only investigated the association between bankruptcy risk and financial reporting quality (Ding et al 2007;Chu et al 2011;Zang 2012;Campa 2015;Agrawal and Chatterjee 2015;Jaggi and Sun 2016;Muljono and Suk 2018;Li et al 2020;Rakshit and Paul 2020) but has also paid attention to the impact of related party transactions on earnings management (Jian 2003;Thomas et al 2004;Chen et al 2011b;Rahmat et al 2020;Subastian et al 2021). However, these research topics have been simultaneously less discussed in a developing market that has experienced one of the most unprecedented economic sanctions.…”

Social Capital, Intellectual Capital, and Audit Fee: Conflicting Evidence from Iran

“…Once enterprise management decides to take part in RPTs to expropriate corporate resources, then they have motivations for distorting earnings, either to justify or increase these perquisites or possibly to mask such expropriation (Gordon and Henry 2005;Marchini et al 2018;. The findings of some researchers testify to the fact that companies use RPTs as a tool to manage profits (Healy and Wahlen 1999;Thomas et al 2004;Djankov et al 2008;Subastian et al 2021), which can significantly affect audit fees. In this study, RPT as a control variable is calculated as the sum of the disclosed related-party transaction prices, such as RPT-purchase, RPT-sale, and RPT-loan, in notes, to the annual financial statements divided by beginning assets of the firms (Sarlak and Akbari 2014;.…”

Financial Distress Assessment Using Related Party Transactions

“…The Indian financial sector, however, exhibits a lower occurrence of RPTs to manage earnings, on account of the stringent laws and rules laid down by the banking regulatory body (Kumari & Pattanayak, 2013). Manufacturing and consumer goods companies have been identified as industries with high RPTs in Indonesia (Handyani et al, 2021; Subastian et al, 2021).…”