posted on 2023-05-20, 20:24authored byHabib, 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/