Related Party Transcations And Earnings Management: Evidence From China's Listed Companies

Related party transactions are prevalent in China's listed companies, and the frequency and size of them are still on the rise. The original purpose of related party transactions is to reduce transaction costs and operational risks. But as the transactions of transferring resources and obligations between listed companies and related parties who have a specific interest with companies, related party transactions may be a means of earnings management.Using a sample of A-share listed companies in Shanghai and Shenzhen Stock Exchange, this paper examines whether the companies use related party transactions to achieve their earnings management purposes. Furthermore, it investigates whether the listed companies use different types of related party transactions under different motivations of earnings management. The conclusions are as follows.1. The total related party transactions significantly increase earnings management of listed companies. Of the 11 types of related party transactions, the following types are significantly and positively related to earnings management: goods purchase, goods sale, services receiving, loans provision, loans receiving, guarantees provision, guarantees receiving and other expenditures. Therefore, not only related party transactions of current item, but also those of extraordinary item are means of earnings management.2. The right-offering companies and SEO companies are more likely to manage earnings through related party transactions compared to companies those do not offering additional shares in the next year. And the ST companies have stronger motivations of managing earnings through related party transactions than non ST companies.3. To achieve different motives of earnings management, the listed companies use different types of related party transactions.(1) To achieve the rights offering motivation and meet the ROE threshold, the right-offering companies and SEO companies singularly undertake large-scale related goods purchase and services provision which increase earnings management significantly in the pre-offering year and the offering year, and have no such significant effect in the post-offering year.(2) For the ST companies, the greater degree of earnings management after ST is positivly associated with the likelihood of canceling ST in the next year. To achieve the goal of canceling ST in the next year, the ST companies undertake such related party transactions as services receiving, loans receiving and asset restructuring which have significantly positive effects on earnings management.(3) The companies undertaking non-tradable shares reform may manage their earnings downward to reduce the consideration before the reform and undertake large-scale guarantees receiving and asset restructuring which significantly increase earnings management in the pre-reform year and the reform year, and have no such significant effect in the post-reform year.To regulate related party transactions and earnings management, some suggestions are put forward on the emphasized supervision, the disclosure of related party transactions, the improvement of supervisory policy based on accounting earnings and the internal corporate governance.