Cash‐based related party transactions in new economy firms
Abstract
Purpose
This paper aims to investigate associations between related party transactions (RPTs) and governance and performance factors of new economy firms.
Design/methodology/approach
Previous research has examined the RPTs of large US firms. In contrast, the authors focus on smaller, newly listed Australian firms. Referred to as “commitments test entities” (CTE), these firms are distinguished by the unique Australian Securities Exchange listing requirements applying to them, and associated additional (quarterly cash flow) reporting requirements.
Findings
While strong corporate governance characteristics may be expected to constrain the amounts of payments and loans to related parties, we find only weak evidence to support that proposition. The results show that financial condition dominates the decision to engage in RPTs and suggest that external monitoring (associated both with larger firm size and the quarterly reporting phase) are a more effective restraint on the magnitude of RPTs for these high‐risk CTE firms.
Research limitations/implications
The findings are generally consistent with the “conflict of interest view” proposed by Gordon et al. suggesting RPTs do not serve shareholders' interests.
Practical implications
The findings suggest that external monitoring may be a more effective control over RPTs than internal corporate governance mechanisms in this institutional context of small “cashbox” firms. Since RPTs may not be in the best interests of shareholders, extending mandatory RPT disclosures to all periodic cash flow reports warrants further consideration by regulators.
Originality/value
This study contributes to the limited research on the effects and implications of RPTs.
Keywords
Citation
Gallery, G., Gallery, N. and Supranowicz, M. (2008), "Cash‐based related party transactions in new economy firms", Accounting Research Journal, Vol. 21 No. 2, pp. 147-166. https://doi.org/10.1108/10309610810905935
Publisher
:Emerald Group Publishing Limited
Copyright © 2008, Emerald Group Publishing Limited