Relationship of Related Party Transactions and Earnings Management

Sari, Nur Astri; Nailiah, Rusma; Suhaili, Achmad; Handayani, Fitria

doi:10.47312/aar.v5i02.309

Cited by 3 publications

(10 citation statements)

References 8 publications

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“…Strong research documents in the Iran market have confirmed that carrying out RPTs by Iranian firms can lead to the loss of shareholder wealth, which is in line with the tunneling hypothesis (Zimon et al 2021). For example, the results of Sarlak and Akbari (2014), as well as Ghannad et al (2018), show a positive connection between RPTs and profit distortion. Both of them argue that due to the separation of ownership from management and the existence of a conflict of interest between them, RPTs in Iran's context lead to the loss of shareholder wealth, and the Iranian managers tend to manage profits to cover up this transfer of wealth.…”

Section: The Relationship Between Related Party Transactions and Fina...mentioning

confidence: 59%

“…In fact, sometimes a transaction is made to gain access to the experience, expertise, and unique skills of a related party or to compensate for services, in which case there is no incentive to manage profits (Gordon and Henry 2005). In the same vein, various studies so far have shown that there is no specific incentive to manage profits when dealing with a related party (Kuan et al 2010;Jian and Wong 2010;El-Helaly et al 2018;Alhadab et al 2020;Sari et al 2021).…”

Section: The Relationship Between Related Party Transactions and Fina...mentioning

confidence: 99%

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

Tarighi

Hosseiny

Abbaszadeh

et al. 2022

Risks

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The paper aims to investigate the effects of financial distress risk (FDR) and related party transactions (RPT) on financial reporting quality (FRQ) in an emerging market called Iran. In this study, the ordinary least squares regression (OLS) method is employed to test the hypotheses; moreover, Jones’ discretionary accruals model is used to assess the financial reporting quality (FRQ). The results show financially distressed companies have a lower financial reporting quality because they try to mislead other stakeholders about the corporate actual performance to attract more investors and lenders. Consistent with the “tunneling” or “conflict of interests transaction” assumption, our findings confirm there is a positive association between related party transactions through loan and accrual-based profit management. In other words, Iranian managers participate in loan-related party transactions to expropriate their firm’s resources and then manipulate financial statements to mask such expropriation. Finally, additional analysis indicates that financial reporting quality is seen well among firms having higher sale growth and more institutional owners, whereas the variables of ROA and financial leverage negatively affect financial information quality.

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Section: The Relationship Between Related Party Transactions and Fina...mentioning

confidence: 59%

Section: The Relationship Between Related Party Transactions and Fina...mentioning

confidence: 99%

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

Tarighi

Hosseiny

Abbaszadeh

et al. 2022

Risks

View full text Add to dashboard Cite

show abstract

“…There is also evidence (Kohlbeck et al, 2018) that family firms are more prone to enter into RPTs and that their financial performance declines when they report transactions with directors, officers and major shareholders. When opportunistic RPTs are put in place, managers may resort to EM practices to increase the benefits extracted or to disguise the expropriations perpetrated to the detriment of outsiders (Sarlak and Akbari, 2014;Marchini et al, 2018). Studies focusing on emerging markets have pointed out that RPTs exacerbate REM, but family ownership moderates this opportunistic association (Haji-Abdullah and Wan-Hussin, 2015).…”

Section: Earnings Management Rpts and Family Firmsmentioning

confidence: 99%

“…, 2018) that family firms are more prone to enter into RPTs and that their financial performance declines when they report transactions with directors, officers and major shareholders. When opportunistic RPTs are put in place, managers may resort to EM practices to increase the benefits extracted or to disguise the expropriations perpetrated to the detriment of outsiders (Sarlak and Akbari, 2014; Marchini et al. , 2018).…”

Section: Theoretical Framework Literature Review and Hypotheses Devel...mentioning

confidence: 99%

Related party transactions and earnings management in family firms: the moderating role of board characteristics

Gavana

Gottardo

Moisello

2022

JFBM

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PurposeThe purpose of this paper is to investigate the effect of family control on the association between related party transactions (RPTs) and different forms of accrual-based earnings management (AEM) and real earnings management (REM), analyzing the effect of board characteristics on the possible association.Design/methodology/approachThis paper studies a sample of Italian non-financial listed firms over the 2014–2019 period, by GLS regression models, controlling for the fixed effects of the company's sector of operation and the year.FindingsResults indicate a different association between RPTs and earnings management (EM) in family and non-family firms. They point out that family firms use RPTs in association with downward AEM and REM perpetrated by abnormal discretionary expenses as well as a substitute of REM via abnormal production costs. For non-family firms, findings indicate only a substitution effect between RPTs and AEM. Furthermore, CEO duality, board gender diversity and the presence of the family on the board positively moderate the association between RPTs and, respectively, REM implemented through sales manipulations, downward AEM and upward AEM.Originality/valueThis study suggests that the socioemotional wealth (SEW) differently affects the relationship between RPTs and EM, according to the form of the latter. It also points out family firms' heterogeneity in earnings manipulations, by providing evidence of the moderating role of board characteristics on the association between RPTs and the various forms of EM.

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“…This is often prompted by the pressure from analysts and investors (Shin et al, 2021). RPTs are also used to manipulate accruals in a company and thus change the financial performance reports to show a better picture (Sari et al, 2020).…”

Section: Related Party Transactionsmentioning

confidence: 99%

Financial Distress Assessment Using Related Party Transactions

Mahtani¹

2022

Indian Journal of Corporate Governance

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In the past few years, several companies in India have filed for bankruptcy, after facing financial distress. Investigations showed that many of these companies, which were from the infrastructure sector, had high values of related party transactions (RPTs) before and during the financial crisis. In this study, RPTs towards sales, loans or payments are analysed for these companies to assess if they have a pattern that can be an indicator of ensuing financial distress. The article develops a model for assessing financial distress with a combination of RPTs and accounting variables. The sample uses financial data from 2010 to 2016 of 18 companies facing financial distress and combines with 15 financially stable companies from the same sector. The study shows that combining RPTs and accounting variables in a model provides higher accuracy in assessing financial distress when compared to a model with accounting variables only. The study recommends that such transactions by financially unstable companies should be monitored closely by lenders and investors, to ensure there is no diversion of funds during the distress period. There are few studies in India or globally on the pattern of RPTs made by financially distressed companies.

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Relationship of Related Party Transactions and Earnings Management

Cited by 3 publications

References 8 publications

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

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

Related party transactions and earnings management in family firms: the moderating role of board characteristics

Financial Distress Assessment Using Related Party Transactions

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