Navigating the web of corporate dealings: related-party transactions, earnings management, and audit committee oversight

Zahra Hoor (), Farzaneh Nassirzadeh (), Davood Askarany () and Mohsen Tavakoli Shandiz ()
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Zahra Hoor: Ferdowsi University of Mashhad
Farzaneh Nassirzadeh: Ferdowsi University of Mashhad
Davood Askarany: The University of Auckland
Mohsen Tavakoli Shandiz: Ferdowsi University of Mashhad

Business Economics, 2025, vol. 60, issue 2, No 5, 99-115

Abstract: Abstract The primary purpose of this study is to contribute to a deeper understanding of the economic consequences of related-party transactions (RPTs) and earnings management on firm performance, market efficiency, and investment decisions by investigating how critical characteristics of audit committees—such as gender diversity, financial expertise, and independence—moderate the relationship between RPTs and earnings management, the research provides insights into the mechanisms that can safeguard the integrity of financial reporting. This study aims to bridge the gap in the existing literature by offering empirical evidence of how audit committee oversight can mitigate managerial opportunism, thus ensuring that financial reports accurately reflect a firm’s economic activities, which is critical for efficient capital markets and informed decision-making by business economists. This paper explores the intricate dynamics of related-party transactions, a distinctive facet of business dealings with implications for shareholder interests. The study meticulously examines the nuanced relationship between related-party transactions and both accrual and real earnings management, shedding light on potential mechanisms through which managerial opportunism may manifest. Additionally, the research delves into the moderating influence of key audit committee characteristics—gender diversity, financial expertise, committee size, and member independence—on the relationship mentioned above. Leveraging data from 1683 year-company observations spanning 2016 to 2020, the study employs a multivariate regression model, panel data analysis, and RStudio statistical software. The findings affirm a significant association between related-party transactions and both accrual and real earnings management. Moreover, the study reveals that gender diversity, financial expertise, and independence of audit committee members serve as influential moderators in this relationship. However, audit committee size does not significantly impact the connection between related-party transactions and earnings management. The research’s innovative approach lies in concurrently considering accrual and real earnings management in the context of related-party transactions and exploring the interactive effects of audit committee characteristics—an unexplored aspect. These findings contribute to a nuanced understanding of the intricate interplay between corporate transactions, earnings management, and the regulatory oversight provided by audit committees.

Keywords: Abnormal tone; CEO characteristics; COVID-19 impact; Behavioural perspective; Qualitative reports (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1057/s11369-025-00393-7

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