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Does Auditors' Reputation 'Discourage' Related Party Transactions? The French Case

Author

Listed:
  • Moez Bennouri

    (Pôle Finance Responsable - Rouen Business School - Rouen Business School)

  • Mehdi Nekhili

    (Pôle Finance Responsable - Rouen Business School - Rouen Business School)

  • Philippe Touron

    (Pôle Finance Responsable - Rouen Business School - Rouen Business School)

Abstract

Regulators, standard setters and market participants consider related party transactions a major problem in financial markets. The quality of external auditing may be proposed as an important governance mechanism to alleviate the propensity of insiders to use related party transactions. We test the prevalence of audit quality to reduce the number of these transactions. We consider that audit quality is positively correlated with audit reputation. We use a unique data set with a sample of 85 French firms over the period 2002-2005. The French legal system allows us to concentrate on the reputation dimension of audit firms, as a motivation that mitigates the propensity of insiders to initiate related-party transactions. The results show that high quality external audit firms reduce significantly the frequency of related-party transactions. The effect of audit quality seems to be the most important variable explaining the frequency of related-party transactions. These results are obtained after controlling for the selection bias related to the choice of external auditors, using a two-step Heckman procedure.

Suggested Citation

  • Moez Bennouri & Mehdi Nekhili & Philippe Touron, 2011. "Does Auditors' Reputation 'Discourage' Related Party Transactions? The French Case," Post-Print hal-00714209, HAL.
    • Handle: RePEc:hal:journl:hal-00714209
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    Cited by:

    1. 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).
    2. Bhandari, Avishek & Kohlbeck, Mark & Mayhew, Brian, 2022. "Association of related party transactions with sensitivity of investments and external financing," Journal of Corporate Finance, Elsevier, vol. 72(C).
    3. Farooq, Muhammad Umar & Su, Kun & Boubaker, Sabri & Ali Gull, Ammar, 2022. "Does gender promote ethical and risk-averse behavior among CEOs? An illustration through related-party transactions," Finance Research Letters, Elsevier, vol. 47(PB).
    4. 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).
    5. 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.
    6. Hyunjung Choi & Jungeun Cho, 2021. "Related-Party Transactions, Chaebol Affiliations, and the Value of Cash Holdings," Sustainability, MDPI, vol. 13(2), pages 1-13, January.
    7. Nicole V. S. Ratzinger-Sakel & Sophie Audousset-Coulier & Jaana Kettunen & Cédric Lesage, 2013. "Joint Audit: Issues and Challenges for Researchers and Policy-Makers," Accounting in Europe, Taylor & Francis Journals, vol. 10(2), pages 175-199, November.
    8. Bi, XiaoGang & Tang, Judy & Tharyan, Rajesh, 2020. "Switching due diligence auditor in Chinese mergers and acquisitions," Research in International Business and Finance, Elsevier, vol. 54(C).

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