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Related party transactions as a source of earnings management

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  • Jean Jinghan Chen
  • Peng Cheng
  • Xinrong Xiao

Abstract

In this article, we contribute to the earnings management literature by addressing the issue of Related Party Transactions (RPTs) during a firm's Initial Public Offering (IPO) process. We regard RPT-based earnings management as a kind of agency problem in the context of Chinese IPOs, and argue that the conflicts of interests between the controlling shareholders and the minority shareholders are the root of RPT-based earnings management in Chinese IPOs. We provide empirical evidence to demonstrate that RPT-based earnings management in a portfolio of earnings management tools including accruals management, and how it affects the firm's post-IPO long-term performance in China. Using 257 Chinese A and B shares IPOs during 1999 and 2000, our empirical findings suggest that controlling shareholders structure operating RPTs in pre-IPO period and these RPTs are positively associated with firm's operating performance. The decline in operating RPTs after IPO contributes to firm's post-IPO long-term underperformance and negatively affects firms' stock return.

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  • Jean Jinghan Chen & Peng Cheng & Xinrong Xiao, 2011. "Related party transactions as a source of earnings management," Applied Financial Economics, Taylor & Francis Journals, vol. 21(3), pages 165-181.
    • Handle: RePEc:taf:apfiec:v:21:y:2011:i:3:p:165-181
    DOI: 10.1080/09603107.2010.528361
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    2. Zhang, Han & Li, Minghui & Yang, Yujie, 2024. "Does common institutional ownership constrain related party transactions? Evidence from China," International Review of Economics & Finance, Elsevier, vol. 93(PB), pages 1015-1042.
    3. Challoner A. Matero & Hsien-Li Lee, 2024. "Impact of Outside Blockholders on Related Party Transactions and Book-tax Conformity Link," International Journal of Research and Scientific Innovation, International Journal of Research and Scientific Innovation (IJRSI), vol. 11(7), pages 1053-1064, July.
    4. 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).
    5. Habib, Ahsan & Muhammadi, Abdul Haris & Jiang, Haiyan, 2017. "Political Connections and Related Party Transactions: Evidence from Indonesia," The International Journal of Accounting, Elsevier, vol. 52(1), pages 45-63.
    6. Haiyan Jiang & Gary Tian & Donghua Zhou, 2021. "The influence of the deregulation of short‐selling on related‐party transactions: Evidence from China," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(5-6), pages 1022-1056, May.
    7. Hong Nguyen Thi Phuong & Van Loi Tran, 2020. "The impact of related parties’ trading on the listed company’s earnings management - evidence in Vietnam," Management, Sciendo, vol. 24(2), pages 181-208, December.
    8. Andrikopoulos, Andreas & Merika, Anna & Merikas, Andreas & Sigalas, Christos, 2021. "Related party transactions and principal-principal conflicts in public companies: Evidence from the maritime shipping industry," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 145(C).
    9. Abdullah Almutairi & Baban Eulaiwi & Robert Evans & Grantley Taylor, 2023. "Tax Haven Use and Related‐Party Transactions: Evidence from Australia," Australian Accounting Review, CPA Australia, vol. 33(4), pages 352-374, December.
    10. Redhwan Ahmed Al-Dhamari & Bakr Al-Gamrh & Ku Nor Izah Ku Ismail & Samihah Saad Haji Ismail, 2018. "Related party transactions and audit fees: the role of the internal audit function," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 22(1), pages 187-212, March.
    11. Mohd Mohid Rahmat & Kamran Ahmed & Gerald J. Lobo, 2020. "Related Party Transactions, Value Relevance and Informativeness of Earnings: Evidence from Four Economies in East Asia," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 23(01), pages 1-42, March.
    12. Zhe Shen & Jerry Coakley & Norvald Instefjord, 2014. "Earnings management and IPO anomalies in China," Review of Quantitative Finance and Accounting, Springer, vol. 42(1), pages 69-93, January.
    13. Mai, Nhat Chi, 2020. "Related Party Transactions, State Ownership, the Cost of Corporate Debt, and Corporate Tax Avoidance: Evidence from Vietnam," OSF Preprints y5qj3, Center for Open Science.
    14. Guang-Zheng Chen, 2020. "Related Party Transactions and Opinion Shopping," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 10(1), pages 1-9.
    15. Pietro Fera & Rosa Vinciguerra, 2022. "Minorities? Representativeness on the Board and their Effect on the Level of Compliance with the Italian RPTs Regulation," FINANCIAL REPORTING, FrancoAngeli Editore, vol. 2022(2), pages 57-88.
    16. Roy Kouwenberg & Pipat Thontirawong, 2016. "Group affiliation and earnings management of Asian IPO issuers," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 897-917, November.
    17. Abdul Rasheed P C & T. Mallikarjunappa & K.T. Thomachan, 2019. "Promoter Ownership, Related Party Transactions and Firm Performance: A Study Among Selected Companies in India," FIIB Business Review, , vol. 8(3), pages 205-217, September.
    18. Giovanna Gavana & Pietro Gottardo & Anna Maria Moisello, 2022. "Related Party Transactions and Earnings Management: The Moderating Effect of ESG Performance," Sustainability, MDPI, vol. 14(10), pages 1-21, May.
    19. El-Helaly, Moataz & Georgiou, Ifigenia & Lowe, Alan D., 2018. "The interplay between related party transactions and earnings management: The role of audit quality," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 32(C), pages 47-60.
    20. Ole-Kristian Hope & Haihao Lu & Sasan Saiy, 2019. "Director compensation and related party transactions," Review of Accounting Studies, Springer, vol. 24(4), pages 1392-1426, December.
    21. Pier Luigi Marchini & Tatiana Mazza & Alice Medioli, 2018. "The impact of related party transactions on earnings management: some insights from the Italian context," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 22(4), pages 981-1014, December.
    22. Chen, Guang-Zheng, 2023. "Social ties and related party transactions," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 53(C).
    23. Habib, Ahsan & Muhammadi, Abdul Haris & Jiang, Haiyan, 2017. "Political connections, related party transactions, and auditor choice: Evidence from Indonesia," Journal of Contemporary Accounting and Economics, Elsevier, vol. 13(1), pages 1-19.

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