The Influence of Corporate Governance Mechanism on the Relationship between Related Party Transactions and Earnings Management

The objective of this study is to investigate the relationship between related party transactions (RPT) and earnings management. This study argues there is a different influence between RPT a priori likely to result in expropriation and RPT a priori not likely to result in expropriation. RPT a prior...

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Main Authors: Aria Farah Mita, Sidharta Utama
Format: Article
Language:English
Published: Prasetiya Mulya Publishing 2014-04-01
Series:International Research Journal of Business Studies
Subjects:
Online Access:http://irjbs.com/index.php/jurnalirjbs/article/view/1051
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author Aria Farah Mita
Sidharta Utama
author_facet Aria Farah Mita
Sidharta Utama
author_sort Aria Farah Mita
collection DOAJ
description The objective of this study is to investigate the relationship between related party transactions (RPT) and earnings management. This study argues there is a different influence between RPT a priori likely to result in expropriation and RPT a priori not likely to result in expropriation. RPT a priori likely to result in expropriation creates an incentive to management or controlling shareholder to overstate income to cover or mask their expropriation. This study uses non-absolute discretionary accruals based on Kazsnik model to proxy earnings management. Corporate governance mechanism should reduce the incentive to overstate income in a company that involves in RPT a priori likely to result in expropriation. The results of this study show that the earnings management (income increasing) is affected by the existence of RPT a priori likely to result in expropriation and corporate governance mechanism, but it is not affected by the size/value of the transactions. As expected, companies involving in RPT a priori likely to result in expropriation with weak corporate governance mechanism, tend to manage earnings that increase income. We find that strong corporate governance mechanism decreases the discretionary accruals in companies which have RPT a priori likely to result in expropriation.
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spelling doaj.art-7399fc17d63d49ec94103ba33aabeb562022-12-22T02:12:30ZengPrasetiya Mulya PublishingInternational Research Journal of Business Studies2089-62712338-45652014-04-017111210.21632/irjbs.7.1.1-1297The Influence of Corporate Governance Mechanism on the Relationship between Related Party Transactions and Earnings ManagementAria Farah Mita0Sidharta UtamaFaculty of Economic, University of IndonesiaThe objective of this study is to investigate the relationship between related party transactions (RPT) and earnings management. This study argues there is a different influence between RPT a priori likely to result in expropriation and RPT a priori not likely to result in expropriation. RPT a priori likely to result in expropriation creates an incentive to management or controlling shareholder to overstate income to cover or mask their expropriation. This study uses non-absolute discretionary accruals based on Kazsnik model to proxy earnings management. Corporate governance mechanism should reduce the incentive to overstate income in a company that involves in RPT a priori likely to result in expropriation. The results of this study show that the earnings management (income increasing) is affected by the existence of RPT a priori likely to result in expropriation and corporate governance mechanism, but it is not affected by the size/value of the transactions. As expected, companies involving in RPT a priori likely to result in expropriation with weak corporate governance mechanism, tend to manage earnings that increase income. We find that strong corporate governance mechanism decreases the discretionary accruals in companies which have RPT a priori likely to result in expropriation.http://irjbs.com/index.php/jurnalirjbs/article/view/1051Related Party TransactionsEarnings ManagementDiscretionary AccrualsCorporate Governance
spellingShingle Aria Farah Mita
Sidharta Utama
The Influence of Corporate Governance Mechanism on the Relationship between Related Party Transactions and Earnings Management
International Research Journal of Business Studies
Related Party Transactions
Earnings Management
Discretionary Accruals
Corporate Governance
title The Influence of Corporate Governance Mechanism on the Relationship between Related Party Transactions and Earnings Management
title_full The Influence of Corporate Governance Mechanism on the Relationship between Related Party Transactions and Earnings Management
title_fullStr The Influence of Corporate Governance Mechanism on the Relationship between Related Party Transactions and Earnings Management
title_full_unstemmed The Influence of Corporate Governance Mechanism on the Relationship between Related Party Transactions and Earnings Management
title_short The Influence of Corporate Governance Mechanism on the Relationship between Related Party Transactions and Earnings Management
title_sort influence of corporate governance mechanism on the relationship between related party transactions and earnings management
topic Related Party Transactions
Earnings Management
Discretionary Accruals
Corporate Governance
url http://irjbs.com/index.php/jurnalirjbs/article/view/1051
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