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Book part
Publication date: 1 December 2004

Elizabeth A. Gordon, Elaine Henry and Darius Palia

Transactions between a firm and its own managers, directors, principal owners or affiliates are known as related party transactions. Such transactions, which are diverse…

Abstract

Transactions between a firm and its own managers, directors, principal owners or affiliates are known as related party transactions. Such transactions, which are diverse and often complex, represent a corporate governance challenge. This paper initiates research in finance on related party transactions, which have implications for agency literature. We first explore two alternative perspectives of related party transactions: the view that such transactions are conflicts of interest which compromise management’s agency responsibility to shareholders as well as directors’ monitoring functions; and the view that such transactions are efficient transactions that fulfill rational economic demands of a firm such as the need for service providers with in-depth firm-specific knowledge. We describe related party transactions for a sample of 112 publicly-traded companies, including the types of transactions and parties involved. This paper provides a starting point in related party transactions research.

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Corporate Governance
Type: Book
ISBN: 978-0-76231-133-0

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Article
Publication date: 12 June 2020

Mohammad Alhadab, Modar Abdullatif and Israa Mansour

The purpose of this study is to examine the relation between related party transactions and both accrual and real earnings management practices in Jordanian industrial…

Abstract

Purpose

The purpose of this study is to examine the relation between related party transactions and both accrual and real earnings management practices in Jordanian industrial public-listed companies, taking into account the uniqueness of the Jordanian company ownership structure.

Design/methodology/approach

Data were collected from Jordanian industrial public-listed companies for the period 2011–2017. Accrual earnings management is measured by using the modified Jones model, whereas real earnings management and related party transactions are measured by using relevant proxies. A regression model is developed and used to assess the relation between related party transactions and earnings management, taking into account the effects of ownership concentration, family ownership and institutional ownership levels of the companies involved.

Findings

Accrual earnings management is negatively associated with related party transactions. Regarding the role of ownership structure, the presence of institutional investors is positively associated with using both related party transactions and real earnings management, whereas ownership concentration plays an efficient role to mitigate the use of both accrual earnings management and related party transactions. No statistically significant relations between real earnings management and related party transactions exist.

Practical implications

This study has direct practical implications for the Jordanian regulatory authorities to enact regulations to limit the misuse of related party transactions and earnings management transactions and ensure sufficient monitoring of these transactions because of their prevalence. Jordanian companies should also enhance their corporate governance systems to better approve and monitor such transactions, including enhancing the role of independent and non-controlling board members in this process.

Originality/value

Related party transactions are considered as a major concern of financial reporting quality in developed countries, and such transactions are found to be relatively more problematic in developing countries, where corporate governance is generally weak, and there is limited disclosure and transparency in financial reporting. From this perspective, this study is one of the very few studies in developing countries that explore the issue of related party transactions and their association with earnings management practices. Thus, the findings of this study can arguably be to some extent generalized to other developing country contexts, because of relatively similar business environment conditions, and therefore potentially fill a gap represented by the paucity of similar studies in developing countries.

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Journal of Financial Reporting and Accounting, vol. 18 no. 3
Type: Research Article
ISSN: 1985-2517

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Article
Publication date: 1 April 1995

JULIET COTTINGHAM and ROGER HUSSEY

The published annual report and accounts of a company are regarded as a main source of information for making investment and other decisions. One assumption used by…

Abstract

The published annual report and accounts of a company are regarded as a main source of information for making investment and other decisions. One assumption used by readers of such accounts is that the financial statements reflect transactions which have been made at arm's‐length. However, the presence of related parties may mean that free market dealings do not exist. In this case the accounts are, at best, misleading and, at worst, fraud may have been perpetrated. Although a number of countries have issued accounting standards which require companies to disclose certain information in respect of related party transactions, this had not occurred in the UK by the summer of 1995. A proposal had been issued by the Accounting Standards Committee (ASC), but this received severe criticism and could not be amended before the ASC was disbanded. Its successor body, the Accounting Standards Board (ASB) has issued its own proposals, taking into account some of the earlier criticisms. The proposals attempt to define related parties, the transactions which are entered into and the disclosures which should take place. The most recent proposals have also received severe criticism mainly because of the additional work entailed for companies and their auditors in relation to the possible benefits to be gained by the users. An examination of the new proposals reveal that there are some definitional problems and that it is far from certain that the disclosures will do more than alert the reader to the presence of related party transactions, nor is it certain that the disclosures will provide information which is useful for sophisticated decision making and it would be naive to believe that such disclosures would prevent fraud.

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Journal of Financial Regulation and Compliance, vol. 3 no. 4
Type: Research Article
ISSN: 1358-1988

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Article
Publication date: 1 May 2019

Masood Fooladi and Maryam Farhadi

Prior studies suggest that most expropriation of firm’s resources is conducted through related party transactions (RPTs). Based on the conflict of interest view, related

Abstract

Purpose

Prior studies suggest that most expropriation of firm’s resources is conducted through related party transactions (RPTs). Based on the conflict of interest view, related parties opportunistically use their authorities to expropriate firms’ resources for their own benefits via RPTs subsequently increasing agency costs and reduce firm value. One important monitoring system suggested by agency theory to reduce the agency problem is corporate governance (CG). CG monitors firm’s performance to align the interests of those who control and those who own the residual claims in a firm. The purpose of this paper is to investigate the moderating effect of CG characteristics on the relationship between RPTs and firm value.

Design/methodology/approach

In order to clarify the distinct effect of RPTs, this study categorises RPTs into two groups including beneficial and detrimental RPTs (DRPTs). Applying “proportionate stratified random sampling”, this study covers a panel of 271 firms listed on Bursa Malaysia over the period of 2009–2011, using a moderated multiple regression model.

Findings

This study documents that firm value is positively associated with beneficial RPTs (BRPTs) and negatively related to detrimental RPTs (DRPTs). In addition, results show that divergence can intensify the negative relationship between DRPTs and firm value. Findings support the necessity for more scrutiny by regulators, policy makers and standard setters to monitor the conflict of interests in RPTs and restrain the power of related parties to protect the firm’s wealth by introducing stricter regulations for RPTs and improve CG practices especially to monitor RPTs in order to limit the opportunistic behaviour of related parties.

Research limitations/implications

Research implications have been presented in Section 10. It has also been summarised in practical implications and social implications sections.

Practical implications

The findings of this study indicate that investors, creditors and policy makers should not consider all RPTs as harmful transactions and it seems necessary to categorise RPTs into different groups including transactions which are detrimental and transactions which are beneficial to the firm.

Social implications

The findings of this study support the necessity for more scrutiny by regulators, policy makers and standard setters to monitor the conflict of interests in RPTs. They should restrain the power of related parties to protect the firm’s wealth by introducing stricter regulations for RPTs and improving CG practices especially to monitor RPTs in order to limit the opportunistic behaviour of related parties.

Originality/value

This study contributes to the RPTs literature by showing that the effect of RPTs on firm value depends on the types of RPTs, and market participants allocate different values to different types of RPTs. Therefore, to fill the gap and clarify the distinct effect of RPTs, this study categorizes RPTs into two groups including beneficial and detrimental RPTs.

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Article
Publication date: 28 January 2020

Norakma Abd Majid, Akmalia Mohamad Ariff and Nor Raihan Mohamad

The Islamic bond, known as sukuk, is an ethical financing avenue driven by religious and profit motives. This study aims to analyze the relation between related party

Abstract

Purpose

The Islamic bond, known as sukuk, is an ethical financing avenue driven by religious and profit motives. This study aims to analyze the relation between related party transactions and Sukuk. Companies with high related parties transactions are deemed to be committed toward social capital that they are more likely to choose sukuk for their debt financing.

Design/methodology/approach

Logistic regression analyses were conducted using data from 122 listed companies in Malaysia. Related party transactions proxy for companies’ commitment to social capital, while the likelihood to choose sukuk represents ethical financing.

Findings

This study documents a positive relationship between related party borrowings and sukuk, suggesting that close ties through related parties have created an ethical sense that is associated with the uptake of sukuk.

Research limitations/implications

Future research can opt other measures of related party transactions, such as by identifying the different categories of transactions and related parties. Future research may also extend the sample size by using samples from several countries to enable analysis involving institutional environment variables of the countries.

Practical implications

Findings of this study highlight sukuk uniqueness by supporting its role as ethical financing avenue through commitment toward social capital.

Originality/value

This study is the first to use the social capital perspective of related party transactions in identifying ethical financing choice that the authors believe is relevant in the institutional context of developing Muslim countries.

Details

Journal of Islamic Accounting and Business Research, vol. 11 no. 6
Type: Research Article
ISSN: 1759-0817

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Article
Publication date: 5 May 2020

Dahlia Sari, Sidharta Utama, Fitriany and Ning Rahayu

The purpose of this paper is to examine the existence of income shifting using the practice of transfer pricing (TP), not only in sales but also in purchase and management…

Abstract

Purpose

The purpose of this paper is to examine the existence of income shifting using the practice of transfer pricing (TP), not only in sales but also in purchase and management service transactions, in Asian developing countries. The paper also investigates the role of the specific anti-avoidance rules (SAAR) in preventing TP practices in various types of transaction.

Design/methodology/approach

The research employs panel data from a sample of 200 subsidiaries in ten countries over the period 2010–2014.

Findings

Different results were obtained from previous research on developed countries, which found that TP practice was proven in sales transactions. This study finds no evidence for TP practices in sales transactions, but that they do take place in purchase, management service fee and management services revenue transactions. The study also finds evidence that SAAR reduces the practice of TP in sales transactions.

Originality/value

The research investigates TP practices, not only those related to sales, but also to purchases, management service fees and management service revenue to related parties. The sample comprises multinational subsidiaries located in Asian developing countries that have rarely been investigated in previous studies. This research examines the effect of SAAR in preventing TP practices in various types of transaction and develops scoring based on an instrument that integrates each SAAR rule/requirement.

Details

International Journal of Emerging Markets, vol. 16 no. 3
Type: Research Article
ISSN: 1746-8809

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Article
Publication date: 2 May 2017

Walaa Wahid Elkelish

The purpose of this paper is to investigate the relationship between related party transactions disclosure (RPTD) and firm valuation in the United Arab Emirates (UAE), an…

Abstract

Purpose

The purpose of this paper is to investigate the relationship between related party transactions disclosure (RPTD) and firm valuation in the United Arab Emirates (UAE), an emerging market.

Design/methodology/approach

Data on study variables were obtained manually from the published financial statements of all listed companies in the stock market during the period 2008-2012. Panel regression analysis models with fixed and random effects were used to ensure reliability of results. Several robustness checks were undertaken on the study outcomes.

Findings

The empirical results show that there is a significant negative relationship between RPTD and firm valuation in the UAE. RPTDs for subsidiaries and associates have the most damaging impact on firm valuation. Other control variables such as corporate governance disclosure (CGD), debt to equity, asset tangibility and sales growth show significant impact on firm valuation.

Research limitations/implications

The potential difference in the understanding of what constitutes “related party” across companies may affect the extent of related party disclosure across companies. Furthermore, some variables are not controlled for such as ownership structure and cultural values.

Practical implications

This paper provides useful practical guidelines for regulatory agencies, corporate managers and other stakeholders for improving the financial reporting system.

Originality/value

RPTD was measured according to the International Financial Reporting Standards (IAS 24) standards. Furthermore, the impact of new control variables such as CGD and product market competition was tested for financial and non-financial sectors.

Details

Journal of Accounting in Emerging Economies, vol. 7 no. 2
Type: Research Article
ISSN: 2042-1168

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Article
Publication date: 11 September 2019

Pier Luigi Marchini, Paolo Andrei and Alice Medioli

In the light of the risks involved in related party transactions, transparent disclosure is particularly important. The impact of related party transactions is relevant…

Abstract

Purpose

In the light of the risks involved in related party transactions, transparent disclosure is particularly important. The impact of related party transactions is relevant for all types of company, but there is greater complexity in business groups where they can be easier to hide. Focusing on business groups, this study aims to analyze the accuracy and transparency of related party transaction information, its understandability, compliance with legislation and comparability. It also examines whether shareholders can be fully informed of all related party transactions by reading only the consolidated financial statement.

Design/methodology/approach

Three case studies are used. The units of analysis are three corporate groups in which the parent company is listed on the Milan Stock Exchange as of 1 July 2015. The authors use two different sets of information. The first is secondary data from company procedures, annual reports and other official documents. They analyzed the separate financial statement of each firm, including the separate financial statement of the parent company and compared all relevant information from the consolidated financial statement and the separate financial statement. The second set is primary data from face-to-face semi-structured interviews and observation.

Findings

This study underlines that there is no requirement for a specific classification of related party transactions disclosure, and as a consequence, it is not possible to compare information. An unambiguous framework for disclosure, established by regulation or legislation, for use by companies supplying related party transactions information would be useful.

Originality/value

The results offer possible recommendations for regulators to improve presentation of related party transaction information without increasing the amount of information required.

Details

Corporate Governance: The International Journal of Business in Society, vol. 19 no. 6
Type: Research Article
ISSN: 1472-0701

Keywords

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Article
Publication date: 1 November 2006

Catherine M. Dalton and Dan R. Dalton

Looks at increasing number of related party transactions despite regulatory scrutiny.

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Abstract

Purpose

Looks at increasing number of related party transactions despite regulatory scrutiny.

Findings

Although related party transactions per se are not illegal or underhanded, they have the potential to raise red flags more readily than other transactions.

Practical implications

Provides executives with information on related party transactions and how to avoid impropriety.

Originality/value

Of particular value to CEOs and other board members

Details

Journal of Business Strategy, vol. 27 no. 6
Type: Research Article
ISSN: 0275-6668

Keywords

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Book part
Publication date: 1 December 2009

Bikram Chatterjee, Monir Zaman Mir and Omar Al Farooque

Purpose – This study investigates the status of related party disclosure in an emerging economy, that is, India. The reason behind concentrating on India is due to its…

Abstract

Purpose – This study investigates the status of related party disclosure in an emerging economy, that is, India. The reason behind concentrating on India is due to its opening of the economy in 1991 to attract foreign investment. Hence, it is significant that investors are provided with credible information. The accounting value of ‘secrecy’ underlying India and the voluntary nature of detailed reporting about related parties in this country further motivated the present study.

Methodology/Approach – The research method includes a content analysis of the ‘related party disclosure’ section of annual reports of a sample of Indian companies for the financial years 2002–2006.

Findings – Indian companies disclosed more than the required minimum level of related party disclosure as required in the Indian accounting standard. No association between related party disclosure with market capitalization, industry affiliation and foreign listing was found for the year 2006. However, when the scores of all the five years 2002–2006 were considered manufacturing and automotive companies disclosed more about related parties than diversified, service and technology.

Research Limitations – The limitations of our findings rests upon the fact that we have not examined the effect of factors such as the composition of management of each company and the presence of Indians/Non-Indians in management.

Originality/Value of the Paper – Most studies exploring disclosure practices are directed towards developed countries. The disclosure practices in developing countries is an under researched area. This paper contributes towards the existing literature by taking the case of an emerging economy, that is, India.

Details

Accounting in Emerging Economies
Type: Book
ISBN: 978-1-84950-626-7

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