The relationship of transactions with related parties (goods and financial resources) with the performance of companies

Dissertation to receive Master degree (M.A)

Field:

Accounting

Abstract

The purpose of this research; Investigating the relationship between transactions with related parties and the performance of companies. In this research, the financial information of 125 companies admitted to the Tehran Stock Exchange during the period of 2016 to 2018 has been examined. The results of this research showed that there is a significant relationship between the company's management performance criteria and transactions with related parties. In this research, two criteria of return on assets and net operating cash flow were used to measure the company's management performance. The results indicate that transactions with related parties (transaction of financial resources) have a positive effect on the return on assets and net operating cash flow; While transactions with related parties (commodity trading) have a negative effect on operational cash flow. However, in this research, there was no evidence of the existence of a relationship between transactions with related parties (trade of goods and trading of financial resources) with the company's market performance criteria (abnormal cumulative return and return on purchase and maintenance).

Key words: trading of goods with related parties, financial transactions with related parties, company performance criteria

1 Introduction

In recent financial scandals, Transactions with related parties have been one of the areas of concern, in such a way that the targeted use of these transactions and their non-disclosure or insufficient disclosure are among the factors of the downfall of companies. In many cases, transactions with related parties are inevitable and beneficial and are repeated in the company's operation cycle, but in certain circumstances, it allows major shareholders or company managers to secure their personal interests at the expense of minority shareholders. Although not all transactions with related parties are opportunistic, the prevailing view is that they are one of the factors influencing risk, and investors attach great importance to it before making an investment. Today, the opportunism of transactions with related parties is one of the factors that decrease the value of the capital market.

Experts believe that one of the reasons for financial crises in companies is doing transactions with related parties and covering them through financial statements. Janko et al. (2008) believe that transactions with related parties can provide a direct opportunity for related parties to withdraw cash from the company through underground activities. The experiences of recent years also testify to the claim that transactions with related parties can not only disrupt value creation as the main task of management, but also gradually cause the collapse of companies. It was on this basis that after Enron's bankruptcy, the American Congress passed the Sarbanes-Oxley Act, which in part refers to transactions with related parties, and it is on this basis that the American Stock Exchange has established strict rules regarding the need to disclose transactions with related parties for listed companies. On the other hand, Friedman et al. (2003) pointed out that transactions with related parties can be used to support companies with poor performance. One of the assumptions of the agency theory is that the management consumes the company's resources for their own benefit in order to maximize their own interests, and transactions with related parties, which often benefit managers and to the detriment of shareholders, are considered a type of consumption of company resources. In addition to disrupting value creation, this type of management misbehavior can also endanger the job security of managers, so in order to avoid the adverse effects of these transactions, they may distort financial statements, which will somehow distort the value creation process in the long term, because it will deprive the owners of the possibility of making informed decisions due to the provision of distorted information. In this regard, the owners try to reduce the cost of agency due to transactions with related parties by establishing mechanisms. Among these mechanisms, we can mention the management contracts in which the owners include provisions in the contracts in order to prevent the opportunistic behavior of the management and consider such transactions as part of the components of the contract in order to reduce the motivation of the managers to perform such opportunistic behaviors.

Another mechanism that the owners use in dealing with transactions with related parties is the use of auditing tools.

Another mechanism that owners use in dealing with transactions with related parties is the use of audit tools, because auditing can lead to a reduction in managers' motivation to conduct transactions with related parties or to distort financial statements in order to cover the effects of such transactions.

In this chapter, the general aspects of the research are discussed. First, the main problem of the research is stated, then the importance and necessity of the research is explained, and then the basic objectives of the research, the research questions and hypotheses, the research model, the novelty and innovation of the research, the scope of the research and the research method are discussed, and at the end, the key words and specialized terms of the research are defined. It is for a large group of people to turn to the stock market. Many individuals and groups, including managers, owners, potential and actual investors, creditors and lenders (given the limited resources and the need for optimal allocation) try to identify, evaluate and choose a type of investment that brings the best economic returns.

In other words, the goal of investors from investing in companies' shares is to obtain reasonable returns through changes in stock prices and dividends received. Therefore, the current value of stocks is one of the decision criteria for buying and selling stocks, and people tend to predict it. In order to provide a model for predicting the current value of shares, the factors affecting it must be identified. In this regard, one of the goals of accounting is to provide information to investors and analysts to help them predict the current value of companies' shares. One of the most important information provided in financial statements is related party transactions. Because of their special nature, this information is of interest to investors, auditors and others who evaluate accounting information.

Transactions with related parties may increase the interests of one party at the expense of the other party and lead to the deprivation of the interests of minority shareholders in favor of controlling shareholders and managers. These groups can benefit by buying and selling assets, goods and services at different prices from the market. They can also obtain loans on favorable terms (La Porta et al., 2003), use company assets as collateral for their personal loans, and even dilute the interests of minority shareholders by acquiring additional shares at a preferential price (MJohnson et al., 2000). Transactions between companies of the same group can transfer profits and assets in these companies so that wealth is transferred from companies located at the bottom of the pyramid to companies located at the top of the pyramid, in which companies have more ownership rights of the main shareholders (Bab Chok et al., 2000). Therefore, the minority shareholders react to the shares of these companies with a low price offer, which leads to a decrease in the company's value and as a result, a decrease in its efficiency (the company's market performance). On the other hand, based on agency theory, management consumes the company's resources for their own benefit in order to maximize their personal interests, and transactions with related parties, which often benefit the managers and to the detriment of the shareholders, are considered a type of consumption of the company's resources. Such opportunistic behavior of managers, in addition to disrupting value creation, can also endanger the job security of managers. Therefore, in order to avoid the negative effects of these transactions, the managers may distort the financial statements, which will somehow distort the long-term value creation process, because it will deprive the owners of the possibility of making informed decisions due to the provision of distorted information. In this regard, the owners are trying to reduce agency costs due to transactions with related parties by establishing mechanisms. According to the mentioned contents, transactions with related parties can have a reducing effect on the performance of the companies, because it will cause the resources that can be spent on improving the performance and strengthening the competitive position of the company to be used for the personal interests of the managers, hence it can be expected that such transactions will have negative effects on the management performance of the companies and finally the value creation process in the company.