Related party transactions, ownership structures and cost of debt: evidence from GCC listed firms

Baban Eulaiwi, Al-Hadi Ahmed Al-Hadi, Lien Duong, Brian Perrin and Grantley Taylor

Accounting Research Journal, 2023, vol. 36, issue 4/5, 471-494

Abstract: Purpose - This study aims to investigate the relation between firms’ use of related party transactions (RPTs) and cost of debt (COD) in Gulf Cooperation Council (GCC) countries. Design/methodology/approach - The authors obtain data from annual reports and the Standard and Poor’s Capital IQ database over the period 2005–2016 period of nonfinancial publicly listed firms on the UAE, KSA, Oman, Bahrain, Kuwait and Qatar stock exchanges. Using a final sample of 1,810 firm-year observations, the authors empirically assess the relation between strategic use of RPTs, the COD issuance and the moderating effects of governance mechanisms. Findings - The authors find that high levels of total RPTs and purchase-based RPTs increase firms’ COD. Furthermore, propping of sales through increased sale-based RPTs is found not to have a significant effect on firms’ COD. The authors also find that ownership factors pertaining to family member founding and royal family ownership negatively moderate the association between the firm’s RPTs and COD. Additionally, the voluntary formation of executive committees has a positive and significant mediating effect on the relation between firms’ purchase-based RPTs and COD. The results are robust to several additional tests and alternative measurement specifications. Research limitations/implications - The positive relationship between purchase-based RPTs and firm financing costs is magnified in countries with high quality of RPT disclosures. This has implications for funding of GCC entities by governments and financial institutions. Originality/value - To the best of the authors’ knowledge, this study is the first to examine how wealth transfer via RPTs in the GCC region is associated with higher COD. The authors also contribute to the outcome of emerging governance regimes in the GCC, which could impact the level of credit risk and/or default risk faced by a firm and, thus, the relation between RPTs and COD. In doing so, the authors provide a more nuanced study by investigating the potential channels that could account for such a relation in an emerging market setting.

Keywords: Related party transactions; Cost of debt; Gulf corporation council; Tunneling (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eme:arjpps:arj-03-2023-0073

DOI: 10.1108/ARJ-03-2023-0073

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