Expropriation through Related Party Transaction (RPT) has been identified as one of the key factors that led to the collapse of several firms globally. Hence, its regulation becomes necessary. This study examines the extent and the determinants of compliance with the disclosure requirements on RPTs by Malaysian listed firms. It also investigates the value-relevance of Malaysian Financial Reporting Standard (MFRS) 124 adoption, real earnings management (REM) in RPTs and the moderating effect of compliance with MFRS 124 on the relationship between REM in RPTs and firm value. The study uses the data collected from the firms with significant RPTs from 2009 to 2015. Findings from the weighted disclosure index indicate a moderate level of compliance with MFRS 124. Furthermore, the regression results reveal that board independence, audit committee financial expertise, family ownership, managerial ownership and firm growth have significant positive relationships with the compliance of MFRS 124. 
Moreover, the study documents that RPTs disclosure is value-relevant. Findings of price model provide evidence that with the adoption of MFRS 124, capital market participants value the EPS of the RPT firms over its BVPS. The study documents that firms use RPTs to perpetrate REM. The results of the Roychowdhury models show that RPTs firms are characterized by low cash flow from operations, high production costs and low discretionary expenditures. It is also established that capital market discounts the stock price of firms that perpetrate REM in RPTs. Also, compliance with disclosure requirements on RPTs mitigates the negative relationship between REM in RPTs and firm value. The study reveals the need for the relevant authorities to increase the level of enforcement to achieve full compliance which will result to increase transparency of financial reporting and investor protection. The results of this study contribute to the agency, resource dependency and capital market theories.

Related party transaction disclosure: compliance, determinants, value-relevance and real earnings management

The objective of this paper is to examine the impacts of stock market segmentations (SMS) and surplus free cash flow (SFCF) on income-increasing discretionary accruals. The study also provides the initial evidence regarding the influence of audit quality (AQ) as a moderating variable on those relationships. A sample of non-financial firms was taken from the list of Amman Stock Exchange over the period 2013-2019. Using Huber-White’s sandwich estimator for pooled OLS regression, the current research presents empirical evidence harmonious with the prediction in all hypotheses. Further, the findings document that a Big 4 auditor weakens the SMS-DAC and SFCF-DAC associations, which suggests that the role of Big 4 audit firms is effective in mitigating management’s opportunistic behaviour. However, the reported results provide beneficial information to investors, regulators, external auditors, policymakers, shareholders, and other countries with similar institutional environment.

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The Moderating Effect of Audit Quality on the Links Between Stock Market Segmentations, Surplus Free Cash Flow, and Income-increasing Discretionary Accruals

Related party transactions (RPTs) either bring efficiency in transaction or result in conflict of interest between majority and minority shareholders. RPTs realize efficiency in transaction...

Promoter Ownership, Related Party Transactions and Firm Performance: A Study Among Selected Companies in India:

Related Party Transactions (RPTs) are perceived as genuine transactions, which fulfill the economic needs of a company. However, the controlling shareholders may use RPTs as a tool for transferring...

https://www.tandfonline.com/doi/pdf/10.1080/23311975.2021.1888669

Related party transactions and audit risk

This study examines the association between controlling shareholders' networks (i.e., controlling shareholders’ proxy (CSProxy) and controlling shareholders’ multiple-directorships (CSMultiD)) and related-party transactions (RPTs), particularly involving controlling shareholders' interests (RPT-conflict). This study also examines the impact of interaction between CSProxy and CSMultiD on firm engagement with RPTs, and RPT-conflict. The hypotheses are tested using a sample of 548 listed companies in Malaysia over the period 2012-2014 with a total of 1,550 observations. The results show that CSProxy is not associated with RPTs, and RPT-conflict. The CSMultiD is also not associated with RPTs. However, it has a positive relationship with RPT-conflict. Additionally, an interaction between CSProxy and CSMultiD increases the likelihood of firms to engage and disclose more RPTs; in contrast, it discloses lower magnitude of RPT-conflict. The opportunistic controlling shareholders may exploit their conflict of interest for private benefits by hiding their intention behind the RPTs. Overall, these findings provide partial empirical support to the argument that controlling shareholders seek to use their network relationship to influence firms to engage with related parties. These findings raise concerns to the regulators and policy makers, specifically on the ability of the controlling shareholders in utilizing their position and networks opportunistically to expropriate firm resources for personal purposes.

https://ejournal.ukm.my/ajac/article/download/25265/8763

Controlling Shareholders’ Proxy and Multiple Directorships: Insight Evidence from Related Party Transactions

This paper reviews the existing requirement on related party transactions (RPTs) disclosure in the Malaysian context and discusses issues surrounding such disclosure. As there are two conflicting effects of RPTs, sufficient information should be made available to assist investors in analyzing the risk and return of RPTs. We review prior studies and highlight issues of information disclosure related to RPTs, such as the variations in the level of RPTs disclosure. We propose future research on RPTs to apply content analysis using a voluntary disclosure index to understand more about the breadth and depth of the RPTs information.

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The Breadth and Depth of Related Party Transactions Disclosures

/pdf/the-underlying-motives-for-earnings-management-directors-3qzj2af0qk.pdf

A. Mohamad Ariff

Papers

The Breadth and Depth of Related Party Transactions Disclosures

The Underlying Motives for Earnings Management: Directors' Perspective