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Related party transactions and the cost of debt: evidence from China
Citation
Habib, A and Huang, HJ and Jia, J, Related party transactions and the cost of debt: evidence from China, China Accounting and Finance Review, 22, (4) pp. 132-167. ISSN 1029-807X (2020) [Refereed Article]
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Copyright Statement
Copyright 2020 the authors. Licensed under Creative Commons Attribution 4.0 International (CC BY 4.0) https://creativecommons.org/licenses/by/4.0/
Official URL: https://af.polyu.edu.hk/research/our-journals/chin...
Abstract
This paper investigates the interrelationship between related party transactions (RPTs), cost
of debt, and state ownership in the Chinese setting. Using data from listed Chinese
companies during the period 2003 to 2013, we find that total RPTs increase firms’ cost of
debt financing and that such a result is mainly driven by abnormal RPTs. Hence, the
value-destroying argument with respect to the use of RPTs is empirically supported. We
further partition our sample on the basis of the nature of ownership and find that state
ownership plays a moderating role in the positive association between RPTs and cost of debt.
Such a moderating effect remains significant for firms with tunnelling activities. Finally, we
document that the adverse effect of RPTs on the cost of debt capital is more pronounced for
firms with weak, as opposed to strong, internal control environments. Again, state-owned
enterprises (SOEs) with lower internal control quality are found to have a higher cost of
debt when they report a higher level of total RPTs. Our research contributes to the
inconclusive literature on the influence of state ownership on the cost of debt by
documenting a detrimental impact of RPTs on the cost of debt for SOEs; thus, it also has
policy implications. We suggest that stricter regulation of SOE bankruptcies may enhance
the credibility of SOEs and hence improve lenders’ credit risk assessments of those SOEs
with reported RPTs. Our study also provides practical implications to corporate boards and
senior management teams by highlighting the detrimental effect of opportunistic RPTs on
the cost of debt financing.
Item Details
| Item Type: | Refereed Article |
|---|---|
| Keywords: | related party transactions, cost of debt, financial reporting quality |
| Research Division: | Commerce, Management, Tourism and Services |
| Research Group: | Accounting, auditing and accountability |
| Research Field: | Financial accounting |
| Objective Division: | Commercial Services and Tourism |
| Objective Group: | Financial services |
| Objective Field: | Financial services not elsewhere classified |
| UTAS Author: | Jia, J (Dr Jing Jia) |
| ID Code: | 142470 |
| Year Published: | 2020 |
| Deposited By: | TSBE |
| Deposited On: | 2021-01-19 |
| Last Modified: | 2022-08-29 |
| Downloads: | 32 View Download Statistics |
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