Abstract
This study empirically investigates whether related party transactions play an important role in earnings management in Hong Kong Stock Exchange, by using manually collected data comprising 1,278 firms’ yearly observations from all listed company on Hang Seng Composite Industry Indexes from 2016 to 2018. This study analyzes the three most frequent types of related party transactions, including related sales, related lending and related borrowing, and to examine their associations with earnings management. The findings suggest that companies did not have abnormally high level of related party transactions when they have earnings management incentives. Related party transactions are not used in income smoothing or to inflate earnings in Hong Kong Stock Exchange. This study may provide insights to investors on how companies use related party transactions to manipulate earnings. Key words: Related party transactions, earnings manipulation.
Highlights
Over the past years, related party transactions have become extensively popular as firms can divert its earnings and cash to the other members within the group
This paper aims to investigate the association between related party transactions and earnings management as well as the degree of usage of this type of transaction in Hong Kong Stock Exchange
The huge gap between the mean and median shows that some firms have extremely large amount of related party transactions than the others
Summary
Over the past years, related party transactions have become extensively popular as firms can divert its earnings and cash to the other members within the group. Parties within the network can divert their free cash flows to the group with better terms and credits. This type of transaction has aroused the need of academic research with close attention as it could affect the transparency of the financial statements and investors’ decision-making.
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