Proceedings of the Global Conference on Management and Economic
Year: 2024
DOI:
[PDF]
Unveiling the Impact of Related Party Transactions on Earnings Management: How Board Composition Matters?
Mohd Taufik Mohd Suffian; Akmalia Mohamad Ariff; Marijn Janssen; Mochammad Gilang Ramadhan; Masetah Ahmad Tarmizi
ABSTRACT:
Recent corporate scandals involving companies like Hong Kong’s Tianhe Chemicals, Japan’s Toshiba, and Malaysia’s 1MDB have eroded public trust in the accounting profession. In Malaysia, related party transactions (RPTs) and managerial incompetency have sparked financial controversies, intensifying concerns over earnings management practices. Despite the introduction of monitoring mechanisms aimed at curbing abusive RPTs, these transactions persist, and prior research on RPTs in Malaysia remains limited and inconclusive. This study examines the impact of RPTs and board composition on earnings management in Malaysia, analyzing data from 646 firms and 3,230 firm-year observations listed on Bursa Malaysia from 2015 to 2019. Results indicate a significant negative association between RPTs—measured by transaction count and value—and real earnings management. Crucially, strong board composition mitigates this adverse impact by curbing opportunistic behavior and safeguarding minority shareholders’ interests. Interaction effects between board composition and RPTs further underscore that applying best governance practices can reduce information asymmetry and enhance corporate transparency. These insights offer valuable guidance for management and stakeholders dedicated to minimizing earnings management and strengthening corporate governance practices in Malaysia.
keywords: Related party transactions; earnings management; board composition; panel data