Related Party Transactions, Value Relevance and Informativeness of Earnings: Evidence from Four Economies in East Asia

Abstract

We investigate the effect of related party transactions (RPTs) on value relevance and informativeness of accounting earnings for firms based in East Asia. Using a hand-collected sample of 398 listed companies comprising 1194 firm-year observations from Hong Kong, Malaysia, Singapore and Thailand, we find that firms engaging more extensively in RPTs have significantly lower value relevance and lower informativeness of earnings both in the current year and subsequent year than firms engaging less in RPTs. Furthermore, the results indicate that the types of RPTs affect value relevance and informativeness of earnings differently in that the effect of simple and loans RPTs are more negative than complex transactions. The extent of the negative effect of RPTs is lower in Hong Kong and Singapore where investor protection is higher compared to the other two economies. These findings are robust to controlling for firm-specific attributes, corporate governance, ownership structure, earnings quality, and a variety of sensitivity tests. These results are consistent with the conflict of interest view that RPTs compromise the quality of accounting earnings and this leads to the reduction in earnings and market value relationship for firms that engage in RPTs.