Proceedings of the 7th International Conference on Applied Research in Business, Management and Economics
Year: 2024
DOI:
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Exploring The Nexus of Related Party Transactions, Earnings Quality, And Performance: Moderating Influence Of Board Compositions in The Malaysian Context Using Panel Data
Mohd Taufik Mohd Suffian, Adnan Ameen Bakather, Mohamad Rokibul Kabir, Akmalia Mohamed Ariff, Ancella Anitawati Hermawan
ABSTRACT:
This study explores the impact of related party transactions and board compositions on earnings quality and company performance in Malaysia. Analysing data from 646 firms (out of 3,230 total firms-year observations) on Bursa Malaysia over five years (2013-2017), the panel results reveal a negative and significant relationship between related party transactions (measured by number and value of transactions) and earnings quality (measured by real earnings quality). Similarly, related party transactions show a negative significant association with company performance (measured by Tobin’s Q, return on assets, and return on equity). These results counter the Agency Theory Type II, which deals with conflicts between majority and minority shareholders. However, the adverse effect of related party transactions can be mitigated by practicing exemplary board composition mechanisms. Significant progress in the governance of Malaysian companies is evident when the industry’s best practices in these board composition mechanisms are applied. The interaction effect of board compositions between related party transactions and earnings quality as well as the company’s performance suggested that these mechanisms can mitigate the opportunistic behaviour of managers in engaging with earnings activities and controlling shareholders in the expropriation of minority shareholders’ wealth. The result also depicts that the earnings quality is influencing the performance of the company. It is an essential resource for any market participant since it provides a reduced volume of information asymmetries between managers, investors, regulatory agencies, society, and other stakeholders. The current findings can be treated as tools to lessen the earnings quality activities and to increase the company’s performance by the management and stakeholders by applying board composition mechanisms on related party transactions to curtail opportunistic behaviour among the management which relates to agency theory.
keywords:: related party transactions, earnings quality, performance, board composition, panel data