The moderating role of audit quality and firm size in the effect of corporate governance on related party transactions: Evidence from Indonesia

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This study aims to analyze the essential corporate governance determinants of related party transactions (RPTs) in Indonesia. Based on a hand-collected sample of three business groups of small, medium, and large-cap publicly listed firms on the Indonesia Stock Exchange (IDX) for 2013–2019, panel regression results find that foreign shareholders and firm size have a significant effect, at –2.402 and 0.248, respectively. The moderating model of audit quality shows that domestic shareholders, foreign shareholders, and firm size are significantly negatively associated, with –5.627 and –5.958 at 5%, respectively. Similar results show that foreign shareholders and independent commissioners significantly negatively affect related party transactions at –2.864 and –1.845, moderating the firm size at 10% and 5%, respectively. The moderation of regression results also indicates that audit quality and firm size tend to strengthen negative effects on the association between related party transactions and corporate governance. The moderation interaction confirms that audit quality will determine that domestic and foreign shareholders tend to increase the number of affiliate transactions. The interaction of complete information quality will force domestic and foreign shareholders to increase the role of affiliate transactions in creating firm value. The larger size of the firm, which is owned by foreign shareholders, will increase the intensity of cross-border related party transactions through the combined effects in the context of internationalization with a tendency of expropriation and transfer pricing practices, which can reduce government tax incomes.

Acknowledgment
We are grateful to the Ministry of Education, Culture, Research and Technology, Indonesia, for research grant No. 163/E4.1/AK.04.PT/2021, as well as the editor of the Investment Management and Financial Innovations journal, peer reviewers, and some colleagues for their suggestions, criticism and comments that significantly improved this paper.

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    • Table 1. Description of variables
    • Table 2. Descriptive statistics
    • Table 3. Correlation analysis
    • Table 4. Panel unit root test of the variables
    • Table 5. Panel regression analysis results
    • Conceptualization
      Perdana Wahyu Santosa, Martua Eliakim Tambunan
    • Data curation
      Perdana Wahyu Santosa, Sovi Ismawati Rahayu, Zainal Zawir Simon
    • Formal Analysis
      Perdana Wahyu Santosa
    • Funding acquisition
      Perdana Wahyu Santosa
    • Investigation
      Perdana Wahyu Santosa, Zainal Zawir Simon
    • Methodology
      Perdana Wahyu Santosa, Sovi Ismawati Rahayu, Zainal Zawir Simon, Martua Eliakim Tambunan
    • Project administration
      Perdana Wahyu Santosa, Sovi Ismawati Rahayu, Zainal Zawir Simon
    • Software
      Perdana Wahyu Santosa, Zainal Zawir Simon
    • Validation
      Perdana Wahyu Santosa, Martua Eliakim Tambunan
    • Writing – original draft
      Perdana Wahyu Santosa, Martua Eliakim Tambunan
    • Writing – review & editing
      Perdana Wahyu Santosa
    • Resources
      Sovi Ismawati Rahayu, Martua Eliakim Tambunan
    • Supervision
      Sovi Ismawati Rahayu
    • Visualization
      Sovi Ismawati Rahayu, Zainal Zawir Simon, Martua Eliakim Tambunan