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Do related party transactions always deteriorate earnings informativeness?

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  • Chen, Ching-Lung
  • Chen, Chung-Yu
  • Weng, Pei-Yu

Abstract

There are two competing views in explaining the motives of related party transactions (RPTs): an efficient contracting arrangement to benefit shareholders and a mean for insiders to expropriate outside shareholders via self-dealing. This study hypothesizes that, in Taiwan, a quasi-developed economic unity with high vertical-integrated products and services, a firm’s different types of revenue-related RPTs will reflect its diverse characteristics and result in a distinctive earnings informativeness. We use both the product (or processing) sales and non-operating revenues to examine how RPTs influence the amount of current and future earnings embedded in current stock returns. The empirical results show that earnings informativeness is enhanced for firms disclosing high related-party’s product (or processing) sales, yet it deteriorates for firms reporting high related-party’ non-operating revenues. It suggests the sub-classification of revenue-related RPTs has implication to investors. We run some diagnostic checks and document results that are robust for various specifications.

Suggested Citation

  • Chen, Ching-Lung & Chen, Chung-Yu & Weng, Pei-Yu, 2020. "Do related party transactions always deteriorate earnings informativeness?," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:ecofin:v:54:y:2020:i:c:s1062940820301662
    DOI: 10.1016/j.najef.2020.101270
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    More about this item

    Keywords

    Earnings informativeness; related party transactions (RPTs); Contracting; Agency theory;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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