This study investigates whether or not related party transactions serve as a “red flag” that warns of potential financial misstatement. We hand collect related party transactions for S&P 1500 firms in 2001, 2004, and 2007 and find a positive correlation between these transactions and future restatements, suggesting restatements are more likely when a firm engages in related party transactions. The association is concentrated among transactions that appear to reflect tone at the top rather than arguably more necessary business transactions. We also find RPT firms pay lower audit fees. However, Tone RPT firms that subsequently restate pay higher audit fees, providing evidence that auditors recognize the individual restatement risks of these firms.

Are Related Party Transactions Red Flags

This study investigates whether or not related party transactions serve as “red flags” that warn of potential financial misstatement. We hand-collect related party transactions for S&P 1500 firms in 2001, 2004, and 2007 and find a positive correlation between these transactions and future restatements, suggesting restatements are more likely when a firm engages in related party transactions. The association is concentrated among transactions that appear to reflect “tone at the top” rather than arguably more necessary business transactions. We also find RPT firms pay lower audit fees. However, “tone RPT” firms that subsequently restate pay higher audit fees, providing evidence that auditors recognize the individual restatement risks of these firms. Our results suggest that tone-based RPTs serve as signals of higher risk of material misstatement.

Internationalisation and risk: Literature review, integrative framework and research agenda

In this paper we explore the current state of research on outward foreign direct investment (OFDI) of Chinese firms. A literature review identifies 62 articles in 15 peer-reviewed academic journals that were published between 1986 and 2012. We examine the underlying theories, research methods, motives, determinants, host countries, industries, periods of observation, nationality of authors and performance of Chinese OFDI, as well as the degree of consensus with traditional internationalization theories. We find that the majority of studies find these theories not applicable to explain Chinese OFDI. We discuss possible extensions and modifications and derive implications for future research.

Chinese outward foreign direct investment—a challenge for traditional internationalization theories?

Related party transactions have become a key issue as a result of recent financial scandals. This study examines whether firms use related party transactions for earnings management, and then, whether they try to minimize detection through the format of related party transactions disclosure. Firstly, we analyze the association between related party transactions structure (types and parties involved) and the probability of reporting small earnings increase. Related party transactions may have significant impact on, and implications for, earnings management. According to the agency theory, related party transactions are used opportunistically, while the efficient transaction hypothesis argues that related party transactions meet the economic needs of the business. We next investigate the association between the probability of reporting small earnings increases through related party transactions and disclosure quality. Disclosure quality should be studied in relation to impression management and investor attention; this approach takes account of the idea that earnings management behavior may influence the quality of disclosure as a possible way of lowering conflict of interest. In line with the agency theory, our findings show that revenue related party transactions are more likely to be used to manage earnings than other types of transaction; related party transactions with ultimate parents are associated with lower probability of reporting small earnings increases compared to operations with other related parties. Lastly, our results confirm that the decision to engage in earnings management is related to lower disclosure quality.

The impact of related party transactions on earnings management: some insights from the Italian context

Recent years have witnessed a phenomenal growth in the number of Chinese enterprises “going global.” Drawing on three leading theoretical perspectives including the transaction cost theory, organizational capability theory and eclectic theory, this paper develops hypotheses to test how country risk and cultural distance are associated with entry mode choices of enterprises from China. Based on a sample of 167 Chinese companies, an empirical investigation has been conducted employing logistic regression and hierarchical regression analyses. Our results show that country risk and cultural distance have significant impact on entry mode choice. With the increase of country risk or cultural distance, businesses prefer non-ownership-based entry modes such as trade and licensing. However, entry mode choice is also noticeably influenced by the interaction between country risk and cultural distance, which is a new finding of international entry mode research. Furthermore, private enterprises are more likely to adopt high-involvement entry mode than the state-owned enterprises, and service enterprises are less likely to use high-involvement entry mode, which suggests that different approaches are used to deal with country risk and cultural distance by various types of enterprises.

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Entry mode choice of Chinese enterprises: The impacts of country risk, cultural distance and their interactions

This study investigates the determinants of the cross-border-related party (CBRP) transactions of Chinese firms. Our empirical analysis of companies listed on China's stock exchanges provides insightful findings. First, the size of CBRP transactions is positively associated with concentrated ownership, CEO (chief executive officer) duality, and an imbalance of power among large shareholders. Furthermore, the size of CBRP transactions tends to decrease as the proportion of outside directors rises, but it is likely to increase as the outside directors' compensations become larger. State-owned companies make more CBRP transactions than non-state-owned companies. Finally, the equity incentive for executives produces insignificant effects on CBRP transactions.

Effects of Internal Governance Factors on Cross-Border-Related Party Transactions of Chinese Companies

This study attempts to shed light on the relationship between related-party (RP) transactions and internal governance factors of China’s listed companies. An analysis of a sample of 69 049 RP transactions during 2002–2006 reveals strong evidence that the likelihood of RP transactions is higher for companies with high concentration of ownership, but lower for companies with strong bargaining power of the second and third largest shareholders. There is also clear evidence showing that large compensation for outside directors is associated with greater size of RP transactions, whereas increased average compensation for the three top executives tends to decrease the number of RP transactions. Our results also reveal that the pluralism arraignment, i.e. the same person holding both positions of the board chairman and the chief executive, increases the size of RP transactions significantly. This finding suggests that pluralism reduces the balance of power in corporate governance.

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Determinants of related-party transactions: Evidence from China’s listed companies during 2002-2006

Departing from the traditional profit-maximization assumption underlying the theory of the multinational enterprises (MNEs), this paper proposes a model of the revenue-maximizing MNE subject to the profit constraint. The nonlinear programming techniques are used for the equilibrium analysis of the MNE’ s decision-making. A set of optimal conditions is derived regarding the quantity of output, volume of intra-firm trade, allocation of multinational production, as well as transfer prices in both exogenous and endogenous cases. Under the context, a comparison of the behavioral differences is made between the revenue-maximizing MNE and the profit-maximizing MNE.

An equilibrium analysis of the revenue-maximizing multinational enterprise

This paper proposes a dynamic model of the growth firm facing takeover threats stochastically. The formal analysis here focuses on the defensive payout strategy of value-maximizing management under the circumstances of random stock market valuation errors, and the bidders' perceived synergistic gains. By borrowing the concept of "hazard rate" from reliability theory, The model sheds light on takeover activities and the observed defensive payout phenomenon in the financial markets. It also yields novel testable implications concerning the impact of anti-takeover costs on the target firm's value over time

Songhua Hu

Papers

Entry mode choice of Chinese enterprises: The impacts of country risk, cultural distance and their interactions

Effects of Internal Governance Factors on Cross-Border-Related Party Transactions of Chinese Companies

Determinants of related-party transactions: Evidence from China’s listed companies during 2002-2006

An equilibrium analysis of the revenue-maximizing multinational enterprise

Stochastic Volatility, Takeover Threats and Defensive Payout Strategy