The Relationships among Related Party Transactions, Exports and Earnings Management in Korea

Abstract

Purpose - We investigate the effects of exports and related party transactions on earnings management. In addition, we study their simultaneous multilateral effects on each other in as well as their long-term effects investigated with time lags. Design/Methodology/Approach - In this study, a merged data set of accounting, financial market, and export activities of 8,687 firms listed on Korea Exchange (KRX) from 2006 to 2018 is used. We collect data from TS 2000 database. Then, we formally test our hypotheses using fixed effects models (FEM) and simultaneous equation models (SEM). Findings - First, export firms have more severe earnings management than non-export firms. Second, earnings management has a positive effect on related party transactions for the non-export firms. Third, related party transactions for export firms have a negative effect on earnings management. Fourth, simultaneous equation models verified above mentioned conclusions. Fifth, the effects of earnings management on exports lasted for years while those of exports on earnings management lasted for years. However, the effects of related party transactions on both exports and earnings management lasted only for a year. Research Implications - Based on above findings, we can conclude that firms use exports and related party transactions for earnings management and that firms use related party transactions to manipulate exports of firms. Thus, traditional way of studying earnings management using discretionary accruals might shift focus to related party transactions, especially for export firms with subsidiaries abroad.