Publication Type

Journal Article

Version

acceptedVersion

Publication Date

11-2023

Abstract

This paper examines whether and how firms' engagement in related-party transactions (RPTs) is shaped by public communication of audit risks as required by the expanded audit report. Using the phased regulatory changes in China and a difference-in-differences design with firm fixed effects and matching, we find that firms significantly reduce their RPTs after the adoption of expanded audit reports (EARs). To investigate potential mechanisms, we find that (1) investor scrutiny increases after the adoption of EARs, (2) the reduction of RPTs is more pronounced when EARs are more likely to attract investor attention, and (3) the reduction of RPTs is weaker when firms are less concerned about investor scrutiny. The results suggest that EARs can attract investor scrutiny and increase the possible penalty associated with self-dealing, thus motivating firms to reduce RPTs.

Keywords

related-party transactions, public communication of audit risks, expanded audit report, China, RPT auditing, self-dealing, real effects of disclosure

Discipline

Accounting | Asian Studies | Corporate Finance

Research Areas

Corporate Governance, Auditing and Risk Management

Publication

Auditing: A Journal of Practice & Theory

Volume

42

Issue

4

First Page

23

Last Page

44

ISSN

0278-0380

Identifier

10.2308/AJPT-2021-184

Publisher

American Accounting Association

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.2308/AJPT-2021-184

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