Abstract

This study examines the effect of firms' related-party transactions on the contemporaneous relationship between revenues and expenses. Given that related-party transactions adversely affect earnings quality and stimulate earnings management by firms, this study predicts that related-party transactions negatively affect revenue-expense matching. Using data on Korean-listed firms for the period 2012-2019, a negative association was observed between related-party transactions and revenue-expense matching. Classifying related-party transactions into operating and non-operating related-party transactions, the results show that non-operating related-party transactions adversely affect revenue-expense matching. Furthermore, the negative association between related-party transactions and revenue-expense matching was more pronounced for firms with poor financial health. Specifically, for financially weak firms, non-operating related-party transactions adversely influenced revenue-expense matching. This study provides practical implications for investors and regulators by showing that related-party transactions critically influence the fundamental quality of earnings. Thus, it could impact investors' valuation process. Moreover, the results suggest that regulators and standard setters should take related-party transactions into account to assess the regulations and accounting standards.

Keywords

• related－party transactions
• revenue－expense matching
• earnings quality
• accounting earnings

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