The association between related party transactions and financial distress: the moderating role of advance pricing agreements, earnings management and ownership concentration

Abstract

This study investigates the link between related-party transactions (RPTs) and financial distress. Drawing on agency theory and the efficient contracting perspective, it examines the extent to which this association is moderated by advance pricing agreements (APAs), earnings management (EM), and ownership concentration. Using a sample of 300 Australian-listed firms from 2011 to 2022, we analyse the data using ordinary least squares regression and propensity score matching. The study’s findings indicate that firms engaging in more RPTs are more likely to experience financial distress. The study further provides evidence that APAs, EM, and ownership concentration significantly moderate this association: APAs and strong ownership concentration weaken it, while EM strengthens it. The main findings remain robust across alternative measures of financial distress and after addressing endogeneity concerns. The study’s findings emphasise to regulators the importance of incorporating disclosures on RPTs and APAs to refine rules and promote compliance.