Examining the moderating role of politcal connections of the board in the relationship between related party transactions and earnings management

Subject Areas : Journal of Capital Market Analysis

Ahmad Abdollahi ¹ , Yasser Rezaei Pitenoei ²

1 - Assistant professor in accounting, Golestan Institute of Higher Education, Gorgan, Iran
2 - Assistant Professor of Accounting, University of Guilan, Rasht, Iran.

Received: 2021-12-04 Accepted : 2022-01-11 Published : 2021-11-22

Keywords: Earnings Management, political connections, related-party transactions, state ownership, membership of political figures on boards,

Abstract :

According to the conflict of interest theory, related-party transactions typically occur when a company’s assets are withdrawn in the interest of related parties, and to hide this, managers engage in earnings management. Accordingly, the present study aims at investigating the link between related-party transactions and earnings management in the firms listed on the Tehran Stock Exchange. In addition, it seeks to answer whether political connections moderate this association. To this end, the present study adopts related-party transactions as the independent variable, political connections as the moderating variable, and discretionary accruals as the dependent variable. The statistical population of the research consists of 86 firms listed on the Tehran Stock Exchange during the years 2015-2019. The research hypotheses were tested using a multivariate regression model based on panel data. The findings reveal that related-party transactions are significantly correlated with earnings management. Also, the membership of political figures on the firms’ boards intensifies the relationship between related-party transactions and earnings management.