ABSTRACTThis study aims to examine the effect of related party transactions (RPTs) on firm’s liquidity and the implications arising from carrying out a related party transaction. The study is based on both positive and negative perspective and on fundamental (descriptive – conceptual) research type. The main investigation techniques used were: …
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ABSTRACTThis study aims to examine the effect of related party transactions (RPTs) on firm’s liquidity and the implications arising from carrying out a related party transaction. The study is based on both positive and negative perspective and on fundamental (descriptive – conceptual) research type. The main investigation techniques used were: the literature review, the documents analysis, the comparative analysis, the non-participative observation. The principal result is that the literature generally provides two opposite theories based on which the related party transactions could be explained, namely: the efficiency theory and the conflict of interest theory. The research design issues are discussed: measures used to operationalize RPTs and observable variations in sample size across RPT studies. Evidence is presented on the negative effects of RPTs and the role of regulation, and corporate governance. Based on analysis of data using panel regression, I observe that different forms of related party transactions (RPTs) thus, income, expenses, borrowings and Loans, bank collaterals influenced the firm’s liquidity either negatively or positively. However, the income from related parties are found to be negatively associated with firm liquidity. This is consistent with the hypothesis of principal to agent or manager conflict-of interest in corporate governance. Findings Prior to the studies have associated related party transactions (RPTs) with the expropriation of shareholders’ wealth, declining firm value, lower-quality financial reporting, increased risk of material misstatements and decreases in long-term firm performance. Further, the results demonstrate that account receivables-related transactions have a negative effect on the firm’s liquidity and positive effects on its performance (Tobin’s Q), but there are consequences of high operating costs and the risk of non-performing loans. Banks receive more funds from their related parties (account payables-related RPTs), banks exhibit higher capital capability and lower market performance. Although this study has limited information in determining effect of related party transactions.Keywords: related party transaction, shareholders, earnings management, tunneling, propping.
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