Related Party Transactions and Earnings Management: The Moderating Effect of ESG Performance

Giovanna Gavana, Pietro Gottardo and Anna Maria Moisello
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Giovanna Gavana: Department of Economics, University of Insubria, 21100 Varese, Italy
Pietro Gottardo: Department of Economics and Management, University of Pavia, 27100 Pavia, Italy
Anna Maria Moisello: Department of Economics and Management, University of Pavia, 27100 Pavia, Italy

Sustainability, 2022, vol. 14, issue 10, 1-21

Abstract: The purpose of this paper is to investigate the effect of ESG performance on the possible association between related party transactions (RPTs) and different types of earnings management (EM). We study a sample of Italian non-financial listed firms over the 2014–2019 period, controlling for the fixed effects of the company’s sector of operation and the year. We investigate the effect of Environmental, Social and Governance (ESG) performance scores on the association between related party transactions and real earnings management (REM), as well as accrual-based earnings management (AEM). We provide evidence that firms might use RPTs in association with downward AEM or as a substitute of REM perpetrated by sales anticipations and discretionary expenses reductions, as well as an autonomous form of earnings manipulation. Our empirical evidence shows a significant moderating effect of ESG performance on earnings management. In particular, social as well as governance performance significantly moderate the association between RPTs and downward AEM; environmental performance moderates the possible use of RPTs in association with cashflow-based REM. This is the first study that analyzes the effect of ESG performance on the possible association between related party transactions and earnings management.

Keywords: ESG performance; related party transactions; accrual-based earnings management; real earnings management (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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