Related party transactions and financial distress: role of governance and audit attributes

Abstract

Purpose This study aims to investigate the relationship between related party transactions (RPTs), specifically sales and purchases, and financial distress. It also explores the moderating role of various corporate governance mechanisms and audit-firm characteristics in this relationship. Design/methodology/approach This study spans the period before and during the COVID-19 pandemic and uses a logistic regression model focusing on an eight-year noncylindrical panel data set, covering a sample of Omani listed companies from 2014 to 2021. Findings The empirical findings reveal a contrasting relationship between RPT sales and financial distress: a significant negative relationship in the postpandemic period, and a positive relationship in the prepandemic period. Conversely, RPT purchases exhibit a consistently significant positive relationship across all periods. The presence of a Big Four audit-firm and audit delay are notable moderating variables associated with audit-firm attributes. Additionally, the board’s review of RPT transactions, size, meetings and independence are significant moderator variables pertaining to corporate governance. Research limitations/implications This study provides empirical evidence to inform regulators of the efficiency and opportunistic aspects of RPTs in relation to financial distress. The study’s findings offer valuable guidance to managers by suggesting ways to reinforce corporate governance practices and strengthen audit mechanisms to counteract the negative consequences of RPTs. Originality/value To the best of the author’s knowledge, this study is the first to explore the direct relationship between both RPT sales and purchases and financial distress while also examining the moderating effect of corporate governance and audit attributes. This comprehensive approach distinguishes itself from its unique contributions to the field.