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Related party transactions and the cost of debt: evidence from China

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posted on 2023-05-20, 20:24 authored by Habib, A, Huang, HJ, Jing JiaJing Jia
This paper investigates the interrelationship between related party transactions (RPTs), cost of debt, and state ownership in the Chinese setting. Using data from listed Chinese companies during the period 2003 to 2013, we find that total RPTs increase firms’ cost of debt financing and that such a result is mainly driven by abnormal RPTs. Hence, the value-destroying argument with respect to the use of RPTs is empirically supported. We further partition our sample on the basis of the nature of ownership and find that state ownership plays a moderating role in the positive association between RPTs and cost of debt. Such a moderating effect remains significant for firms with tunnelling activities. Finally, we document that the adverse effect of RPTs on the cost of debt capital is more pronounced for firms with weak, as opposed to strong, internal control environments. Again, state-owned enterprises (SOEs) with lower internal control quality are found to have a higher cost of debt when they report a higher level of total RPTs. Our research contributes to the inconclusive literature on the influence of state ownership on the cost of debt by documenting a detrimental impact of RPTs on the cost of debt for SOEs; thus, it also has policy implications. We suggest that stricter regulation of SOE bankruptcies may enhance the credibility of SOEs and hence improve lenders’ credit risk assessments of those SOEs with reported RPTs. Our study also provides practical implications to corporate boards and senior management teams by highlighting the detrimental effect of opportunistic RPTs on the cost of debt financing.

History

Publication title

China Accounting and Finance Review

Volume

22

Issue

4

Pagination

132-167

ISSN

1029-807X

Department/School

TSBE

Publisher

Hong Kong Polytechnic University

Place of publication

Hong Kong

Rights statement

Copyright 2020 the authors. Licensed under Creative Commons Attribution 4.0 International (CC BY 4.0) https://creativecommons.org/licenses/by/4.0/

Repository Status

  • Open

Socio-economic Objectives

Financial services not elsewhere classified

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