The Impact of Abnormal Related Party Transactions on the Cost of Financing: The Moderating Role of Government Ownership
Keywords:
Transactions with related parties, unusual transactions with related parties, cost of facilities, state ownershipAbstract
The purpose of this study is to examine the impact of abnormal related party transactions on the cost of financing, with a focus on the moderating role of government ownership. This research is applied in nature and follows a descriptive-correlational methodology. By using panel data from 259 companies listed on the Tehran Stock Exchange during the years 2010 to 2021 and applying multiple linear regression, the researcher found that abnormal related party transactions have a significant positive effect on the cost of financing. Based on the tunneling hypothesis, it can be argued that in companies with weaker internal controls, controlling shareholders use abnormal related party transactions as a means to transfer resources and wealth from minority shareholders to themselves. The second hypothesis of the study revealed that state-owned enterprises amplify the effect of related party transactions on the cost of financing. In other words, due to weaker internal controls in state-owned enterprises, more abnormal related party transactions are likely to occur, and managers of such companies tend to use government resources through these transactions to serve personal or group interests. Accordingly, it is natural that when these weaknesses are reported (e.g., in audit qualifications), the risk of default on bank claims by such companies increases. Consequently, creditors and banks demand higher returns in exchange for granting credit to these firms.
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