Cash-based related party transactions in new economy firms

Gerry Gallery, Natalie Gallery and Matthew Supranowicz

Accounting Research Journal, 2008, vol. 21, issue 2, pages 147-166

Abstract: Purpose – This paper aims to investigate associations between related party transactions (RPTs) and governance and performance factors of new economy firms. Design/methodology/approach – Previous research has examined the RPTs of large US firms. In contrast, the authors focus on smaller, newly listed Australian firms. Referred to as “commitments test entities” (CTE), these firms are distinguished by the unique Australian Securities Exchange listing requirements applying to them, and associated additional (quarterly cash flow) reporting requirements. Findings – While strong corporate governance characteristics may be expected to constrain the amounts of payments and loans to related parties, we find only weak evidence to support that proposition. The results show that financial condition dominates the decision to engage in RPTs and suggest that external monitoring (associated both with larger firm size and the quarterly reporting phase) are a more effective restraint on the magnitude of RPTs for these high-risk CTE firms. Research limitations/implications – The findings are generally consistent with the “conflict of interest view” proposed by Gordon et al. suggesting RPTs do not serve shareholders' interests. Practical implications – The findings suggest that external monitoring may be a more effective control over RPTs than internal corporate governance mechanisms in this institutional context of small “cashbox” firms. Since RPTs may not be in the best interests of shareholders, extending mandatory RPT disclosures to all periodic cash flow reports warrants further consideration by regulators. Originality/value – This study contributes to the limited research on the effects and implications of RPTs.

Keywords: Australia; Cash flow; Corporate governance (search for similar items in EconPapers)
Date: 2008

Downloads: (external link)
http://www.emeraldinsight.com/Insight/viewContentI ... le&contentId=1747059
Cannot be freely downloaded

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:eme:arjpps:v:21:y:2008:i:2:p:147-166

Ordering information: This journal article can be ordered from
Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
http://www.emeraldinsight.com/arj.htm

Access Statistics for this article

Accounting Research Journal is edited by Christine Ryan

More articles in Accounting Research Journal from Emerald Group Publishing
Series data maintained by Rebecca Forster ().