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Related party transactions and the cost of debt: evidence from China


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 2020 the authors. Licensed under Creative Commons Attribution 4.0 International (CC BY 4.0)

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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 firmsí 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 lendersí 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
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