Related party transactions and earnings quality: the moderating role of female directors

Abstract

Purpose: This study aims to analyse the effect of related party transactions (RPTs) on earnings quality in a sample of Spanish listed firms, as well as the moderating role played by female directors in the relationship between RPTs and earnings quality. Design/methodology/approach: The sample includes non-financial Spanish listed firms from 2005 to 2019. The authors use panel data analysis based on the firm fixed-effect estimator. Additionally, the authors use the two-step system generalized method of moments estimator to test the robustness of the results. Findings: The results show a negative effect of RPTs on earnings quality. Further analysis reveals that the negative effect is mainly driven by transactions between the firm and its directors and major shareholders, as well as by RPTs that are more likely to reflect insiders’ self-interest. Moreover, the authors show that the presence of female directors reduces the negative impact of RPTs on earnings quality. Practical implications: The study provides practical implications for investors, auditors and policymakers, who should be aware that RPTs might harm earnings quality and adversely affect the flow of financial capital to promising investment opportunities. Additionally, the study evidences the key governance role played by female directors regarding financial reporting policies as RPTs increase. Social implications: The findings promote the need for a higher representation of women in leadership positions since the authors reveal the key governance role played by female directors regarding financial reporting policies as RPTs increase. Originality/value: The results to emerge from the study complement available evidence concerning the effect of RPTs on earnings quality in a continental European country. The authors also provide novel evidence vis-à-vis the role of female directors in the relationship between RPTs and earnings quality.