Related-party transactions and stock price crash risk: evidence from China

Ahsan Habib, Haiyan Jiang, Donghua Zhou

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

This paper investigates the association between related-party transactions (RPTs) and stock price crash risk in China. Our investigation is motivated by the controversy in the RPT literature over whether RPTs are value enhancing or opportunistic. Through the lens of stock price crash risk, we reveal that RPTs may violate the arm’s-length assumption of regular market-based transactions, impairing the representational faithfulness and verifiability of accounting data and, consequently, increasing the risk of future price crash. Importantly, we find that this detrimental economic consequence of RPTs is driven by abnormal RPTs that are opportunistic in nature. Our analyses also extend to operating RPTs, related-party loans, and two types of opportunistic RPTs: tunneling and propping. The positive association between RPTs and stock price crash risk is not mediated by financial reporting quality, suggesting that the risk factors associated with RPTs are operational. Our main results remain robust to a series of tests done to address the potential endogeneity between RPTs and stock price crash risk.
Original languageEnglish
JournalThe International Journal of Accounting
Early online date15 Sep 2021
DOIs
Publication statusE-pub ahead of print - 15 Sep 2021

Keywords

  • Related-party transactions
  • stock price crash risk
  • propping
  • tunneling
  • earnings management

Fingerprint

Dive into the research topics of 'Related-party transactions and stock price crash risk: evidence from China'. Together they form a unique fingerprint.

Cite this