Insider Trading, Tax Haven Utilisation, Managerial Resource Diversion and the Propensity to Engage in Related Party Transactions: Evidence from Australia

Abstract

The thesis comprises three essays on the accounting and financial outcomes of related party transactions (RPTs) in Australian markets. Specifically, these essays explore the role and influences of RPTs on insider trading, tax havens and managerial resource diversion. Standard-setters have long attempted to strike a balance between the legitimate commercial reasons underpinning RPTs and the increased risk posed when insiders deal with the enterprises they control. Although the Financial Accounting Standards Board (FASB) states that RPTs may have legitimate commercial purposes, they are most concerned about the nature of non–arm’s length relationships and outcomes. The three essays extend the knowledge of RPTs and their relationship to corporate insiders’ decisions and behaviour in the context of the Australian market. The first chapter provides an introduction and background relating to RPT regulations in Australia. This chapter presents the objectives and motivation of the study. Further, this chapter provides the results and contribution of the thesis. The second chapter represents the first essay, which examines the association between RPTs and insider trading. The essay uses a sample of the largest 300 Australian firms from 2008 to 2019, and the results show a positive and significant association between RPTs and insider trading. These results indicate that corporate insiders’ trades increase in line with the level of RPTs. Moreover, it uses environmental, social and governance (ESG) as moderator variables. The results indicate that the ESG score moderates the association between RPTs and insider trading. The findings are robust to additional measures of insider trading and endogeneity issues. The third chapter represents the second essay of the thesis, which examines the association between tax haven use and RPTs. The study uses a sample of the largest 300 Australian firms from 2008 to 2019 and finds a positive and significant association between tax haven use and RPTs. Corporate insiders increase transactions with related parties in line with an increase in reliance on tax haven jurisdictions. Moreover, the interaction between tax havens and earnings management is positive and significant with the use of RPTs. Finally, the interaction between ownership concentration and tax haven use is positively related to the use of RPTs. Further, these results are robust iv based on the generalised method of moments (GMM) and propensity score matching (PSM) tests. The fourth chapter represents the third essay of the thesis, which investigates the association between RPTs and managerial resource diversion. This essay uses a sample of the top 300 Australian firms from 2008 to 2019 and find that RPTs are positively and significantly associated with cash holdings and dividends. The essay also finds a negative and significant association between RPTs and capital expenditure. Further, the essay examines the association between RPTs and firm performance. The results show a negative and significant association between RPTs and firm performance. Finally, the results are robust to additional endogeneity tests. The fifth chapter concludes the thesis and provides avenues for future studies.