Related-Party Transactions and Stock Price Crash Risk: Evidence from China

Ahsan Habib, Haiyan Jiang and Donghua Zhou
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Ahsan Habib: School of Accountancy, Massey University Albany, Private Bag 102904, Auckland, 0745, New Zealand
Haiyan Jiang: Department of Accounting and Corporate Governance, Macquarie Business School, Macquarie University, Sydney, Australia
Donghua Zhou: School of Accounting, Jiangxi University of Finance and Economics, Jiangxi 330013, P. R. China

The International Journal of Accounting (TIJA), 2021, vol. 56, issue 04, 1-47

Abstract: This paper investigates the association between related-party transactions (RPTs) and stock price crash risk in China. Our investigation is motivated by the controversy in the RPT literature over whether RPTs are value enhancing or opportunistic. Through the lens of stock price crash risk, we reveal that RPTs may violate the arm’s-length assumption of regular market-based transactions, impairing the representational faithfulness and verifiability of accounting data and, consequently, increasing the risk of future price crash. Importantly, we find that this detrimental economic consequence of RPTs is driven by abnormal RPTs that are opportunistic in nature. Our analyses also extend to operating RPTs, related-party loans, and two types of opportunistic RPTs: tunneling and propping. The positive association between RPTs and stock price crash risk is not mediated by financial reporting quality, suggesting that the risk factors associated with RPTs are operational. Our main results remain robust to a series of tests done to address the potential endogeneity between RPTs and stock price crash risk.

Keywords: Related-party transactions; stock price crash risk; propping; tunneling; earnings management (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S1094406021500207

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