Abstract
We investigate the association between related party transactions (RPT) and real earnings management (REM). We also investigate the role of internal governance mechanism through the effectiveness of board of commissioner and audit committee in mitigating the association between RPT and REM. Our research sample consists of 386 firm-years of manufacturing firms listed in Indonesian Stock Exchange (IDX) from year 2010 - 2014. Using linear regression, we find evidence that RPT has positive association with REM, only when the firm has higher RPT but not in the lower RPT. We find a contradictory result that board of commissioners strengthen the positive association between RPT and REM. Finally, we find evidence that the effectiveness of audit committees weaken the positive association between RPT and REM, both in full sample and in high RPT sample.
Highlights
Weak corporate governance mechanism has a role in allowing the practice of earnings management, while an effective corporate governance functions were found to have significant negative influence on earnings management practice because they play an important role in overseeing the quality of reported earnings [4, 5]
Our study contribute to the other measurement of EM i.e., real earnings management (REM), since it is believed that REM is the preferred method to manage earnings [8, 9] We investigate whether board of commissioners (BCE) and audit committee (ACE) have moderating effect in the association between related party transactions (RPT) and REM
Those prior researches focus only in the accrual earnings management (AEM) while companies prefer using REM because it is more difficult to be detected by auditors [8, 9]
Summary
BCE is a dummy variable with the value of 1 if the score of BCE of a company is equal and above 34 and 0 otherwise. Our findings are consistent with our early prediction (H1) that related party transaction has a positive association with earnings management only if in the condition of sub-sample with high RPT, but not with low RPT. This findings indicate that high related party transactions in a firm can be used as earnings management tools, in the aggregate level of real transactions to expropriate minority shareholders
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
