Three essays on related-party transactions

Abstract

This thesis explores transactions between related-parties by reviewing the vast literature in this area. It also examines individual auditors’ narcissism, one of the key psychological attributes in monitoring these activities, and how the accumulated experiences and workload of an engagement audit team can affect clients decision to engage in opportunistic related-party transactions. Specifically, this thesis comprises three distinctive but related studies.
The first study employs a systematic approach of literature review and focuses on 171 articles published in the fields of accounting, economic, finance, and ethics in the period from 1985 to 2020. This study synthesises and analyses previous literature (i.e., both theoretical and empirical findings) on related-party transactions (RPTs) and develops an agenda for future research in the field. The objectives are to help academics and practitioners identify the underlying intentions of insiders engaging in RPTs, recognise corporate governance factors and institutional mechanisms that predict or determine the occurrence of RPTs, understand the impact of RPTs on accounting performance, stock market performance, and other corporate outcomes. Ultimately, we aim to provide agenda for future research in this field.
The second study examines the effect of auditor narcissism on firm’s incentive to engage in abnormal related-party sales. Using hand-collected data for Chinese listed firms from 2012 to 2020, this study finds that a narcissistic review auditor facilitates more abnormal related-party sales while a narcissistic engagement auditor reduces abnormal related-party sales used during benchmark beating. In addition, findings show that this impact of narcissistic auditor on abnormal related-party sales is more pronounced in private-controlled firms. This study also examines the impact of auditor narcissism on other types of RPTs that are normally subject to opportunism including related-party lending, related-party guarantees, and total amount of abnormal RPTs. Results show that our prior inference holds. Finally, the impact of engagement auditor narcissism on abnormal related-party sales during benchmark beating sustains when we address the potential endogeneity issues.
The third study investigates on the influence of audit team busyness on client’s engagement in opportunistic activities. In particular, this study identifies a specific context, Chinese firms in business groups, in which the agency problem becomes more severe. Findings show that client firms audited by busy audit teams engage in less tunneling activities, while this effect diminishes if the firm is in a big business group. This indicates that while busy audit teams play an effective role in restraining client firms from tunneling through intercorporate loans, this monitoring function disappears when facing more challenging clients including those in a big business group. To identify different circumstances where busy audit teams influence the occurrence of opportunistic RPTs contingently, this study also considers team attention, team knowledge, and team independence as moderators of this relationship.

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Identifiers

ORCID for Alaa Zalata: orcid.org/0000-0003-2018-4313

ORCID for John K Malagila: orcid.org/0000-0001-5327-2286

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