||Study on Related Party Transactions with Mainland China in Taiwan Enterprises
||Study on Related Party Transactions with Mainland China in Taiwan Enterprises
||Department of Accountancy
Affiliates offshore and in China
FDI in China
Industry specialist auditor firms
Related party transactions
This dissertation consists of three essays on related party transactions with Mainland China in Taiwanese enterprises. The first essay, titled “The disclosure of related party transactions and information content”, analyzes the relationship between related party transactions (RPTs) and the information content of investment incomes from capital investment in China by investigating Taiwanese investments in China. Many Taiwanese firms invest in China via offshore holding affiliates, which are mostly located in some districts with loose accounting standards and corporate regulations. Our results show that the impact of RPTs on investment incomes varies with different types of RPT disclosures. In general, the impact of RPT disclosures is more significant on investment incomes from offshore holding affiliates than on investment incomes from Chinese subsidiaries. In addition, the investment incomes disclosed on consolidated financial statements provide slightly higher incremental information content than those on firms’ financial statements, especially for firms reporting no operational RPTs, but financial RPTs.
The second essay, titled “The disclosure of related party transactions and earnings management”, investigates the disclosure of related party transactions in relation to earnings management. For real transaction account variables and incentive variables, the disclosure of RPTs was found to change the impact on discretionary accruals, which is consistent with the conflict of interest hypotheses in the agency theory to manage earnings in our special Taiwan-China relationship samples. Firms which disclose RPTs have an incremental effect on the degree of earnings management. Firms with Chinese subsidiaries also provide more incremental information on the disclosure of RPTs and earnings management than those with offshore holding affiliates. In addition, there has been a significant impact on the regulation effect of the mandatory disclosure of RPTs since 2000. The use of discretionary accruals is negatively related to the return on assets and firm size.
The third essay, titled “The disclosure of related party transactions and corporate governance”, examines the relationship between the disclosure of related party transactions and corporate governance. Five conclusions can be drawn from the results. First, higher shareholdings of insiders, smaller board sizes, a lower percentage of dual CEO/Chair positions, and higher debt policy on the disclosure of RPTs are related to lower agency cost. The results imply that stronger corporate governance mechanisms can constrain agency cost and provide more precise information for Taiwanese companies investing in China. Second, higher shareholdings of insiders, lower deviation of control rights from cash flow rights, smaller board sizes, and higher leverage on the disclosure of RPTs are related to higher firm performance. The results suggest that stronger corporate governance mechanisms can enhance firm performance for Taiwanese companies investing in China. Third, firm performance is negatively related to agency cost. Fourth, there is an intermediary effect on firm performance and corporate governance mechanisms by controlling agency cost under the disclosure of RPTs in the FDI in China. Finally, there has been a regulation effect on the mandatory disclosure of RPTs since 2000.
This thesis contributes to the existing literature both practically and academically. This pioneering study investigates related party transactions between firms and their affiliates, instead of the related persons, in order to provide more precise evidence and understanding of the operating transaction model between them. A detailed description of transactions between Taiwanese firms and their affiliates offshore and in China is presented. Furthermore, evidence on the three major topics, such as information content, earnings management, and corporate governance under the disclosure of related party transactions in Taiwan is provided.
1 OVERVIEW 1
1.1 Background 1
1.2 The context of the study 7
1.2.1 Research concept frame 7
1.2.2 Research frame 8
1.3 Structure of this thesis 11
2 THE DISCLOSURE OF RELATED PARTY TRANSACTIONS
AND INFORMATION CONTENT 12
2.1 Introduction 12
2.2 Related Party Transactions 14
2.2.1 Theoretical background and the literature 14
2.2.2 Foreign Direct Investments in China and Related Party Transactions 16
2.2.3 An illustration of FDIs in China and RPTs: the evidence of TDIs in China 17
2.2.4 Development of hypotheses 18
2.3 Data and Empirical Specification 20
2.3.1 Classifications of related party transactions 20
2.3.2 Data and sample selections 21
2.3.3 Model specifications and variable definition 22
2.3.4 Descriptive statistics 25
2.4 Empirical Evidence and Discussion 25
2.4.1 RPTs and information content 25
2.4.2 RPTs and information content of consolidated financial statements 29
2.4.3 Incremental information content of investment income for non-operating
2.5 Conclusions 35
3 THE DISCLOSURE OF RELATED PARTY TRANSACTIONS
AND EARNINGS MANAGEMENT 37
3.1 Introduction 37
3.2 Related Party Transactions and Earnings Management 40
3.2.1 Theoretical background and related literature 41
3.2.2 Foreign Direct Investments in China and Special Purpose Entities 42
3.2.3 Earnings management and related literature 45
3.2.4 Development of hypotheses 46
3.3 Data and Empirical Specification 49
3.3.1 Data and sample selections 49
3.3.2 DACC model specifications 50
3.3.3 Regression model and variable definition 51
3.4 Results analysis 53
3.4.1 Descriptive statistics 53
3.4.2 Regression result analysis 54
3.5 Conclusions 65
4 THE DISCLOSURE OF RELATED PARTY TRANSACTIONS
AND CORPORATE GOVERNANCE 67
4.1 Introduction 67
4.2 Related Party Transactions and Corporate Governance 71
4.2.1 Theoretical background and related literature 72
4.2.2 Foreign Direct Investments in China and Special Purpose Entities 74
4.2.3 Corporate governance and related literature 76
4.2.4 Hypothesis Development 81
4.3 Date and Empirical Specification 84
4.3.1 Data and sample selections 84
4.3.2 Regression model and variable definitions 85
4.4 Results analysis 88
4.4.1 Descriptive statistics and correlation analysis 88
4.4.2 Regression result analysis 91
4.5 Conclusions 103
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