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

Santosa, Perdana Wahyu and Rahayu, Sovi Ismawati and Simon, Zainal Zawir and Tambunan, Martua Eliakim (2021) The moderating role of audit quality and firm size in the effect of corporate governance on related party transactions: Evidence from Indonesia. Investment Management and Financial Innovations, 18 (4). pp. 166-176. ISSN 1812-9358

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Abstract

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 share- holders 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 share- holders, 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 regres- sion 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 in- teraction 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 inter- nationalization with a tendency of expropriation and transfer pricing practices, which can reduce government tax incomes. Keywords : corporate governance, related party transactions, business group, audit quality, firm size

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