Related party transactions and earnings management under the UK different regulatory environments of the main and alternative investment markets

Mohammad Alhadab and Malek El Diri

Journal of International Accounting, Auditing and Taxation, 2024, vol. 56, issue C

Abstract: Beyond the recent research on related party transactions (RPTs), we study the impact of regulatory environment on RPTs and earnings management. Using a sample of United Kingdom (UK) public firms listed on the lightly regulated Alternative Investment Market (AIM) and the heavily regulated Main Market (Main) of the London Stock Exchange, we find evidence that firms on the Main Market use more efficient and less opportunistic RPTs than those in the AIM market. In addition, efficient RPTs are used as a substitute for the costly real earnings management in the Main Market. Our findings support the efficient contracting hypothesis under the stricter regulation of the Main Market which reduces information asymmetry and enhances internal resource optimization. Our results are robust controlling for endogeneity and selection bias problems.

Keywords: Related party transactions; Regulatory environment; Earnings management; Main Market; Alternative Investment Market; United Kingdom (search for similar items in EconPapers)
JEL-codes: G3 M1 M4 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jiaata:v:56:y:2024:i:c:s1061951824000466

DOI: 10.1016/j.intaccaudtax.2024.100640

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