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Do related party transactions always deteriorate earnings informativeness?

Ching-Lung Chen, Chung-Yu Chen and Pei-Yu Weng

The North American Journal of Economics and Finance, 2020, vol. 54, issue C

Abstract: There are two competing views in explaining the motives of related party transactions (RPTs): an efficient contracting arrangement to benefit shareholders and a mean for insiders to expropriate outside shareholders via self-dealing. This study hypothesizes that, in Taiwan, a quasi-developed economic unity with high vertical-integrated products and services, a firm’s different types of revenue-related RPTs will reflect its diverse characteristics and result in a distinctive earnings informativeness. We use both the product (or processing) sales and non-operating revenues to examine how RPTs influence the amount of current and future earnings embedded in current stock returns. The empirical results show that earnings informativeness is enhanced for firms disclosing high related-party’s product (or processing) sales, yet it deteriorates for firms reporting high related-party’ non-operating revenues. It suggests the sub-classification of revenue-related RPTs has implication to investors. We run some diagnostic checks and document results that are robust for various specifications.

Keywords: Earnings informativeness; related party transactions (RPTs); Contracting; Agency theory (search for similar items in EconPapers)
JEL-codes: M41 M48 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.najef.2020.101270

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