The Impact of Related Party Sales by Listed Chinese Firms on Earnings Informativeness and Earnings Forecasts

Posted: 20 Mar 2007 Last revised: 4 Jun 2013

See all articles by Jiwei Wang

Jiwei Wang

Singapore Management University - School of Accountancy

Hongqi Yuan

Fudan University - School of Management

Date Written: 2012

Abstract

Using a random sample of 140 of China’s listed firms, we show an adverse impact of related party (RP) sales of goods and services on the usefulness of accounting earnings to investors and on the quality of earnings forecasts by financial analysts. Consistent with the contention that RP sales may violate the arm’s-length assumption of regular transactions and consequently impair the representational faithfulness and verifiability of accounting data, we find that earnings of firms engaged in RP sales are at least 33% less informative after controlling for factors known to affect earnings informativeness. We also find that financial analysts are overly credulous in their acceptance of earnings numbers that are contaminated by unreliable RP sales, and provide less accurate and more optimistic earnings forecasts for firms with more RP sales. Overall, our results provide strong empirical evidence on the negative impact of RP transactions on the usefulness of accounting earnings data used by investors and by financial analysts.

Keywords: Related Party Sales, Earning Informativeness, Earnings Quality, Earnings Forecasts

JEL Classification: M41, G14, G24

Suggested Citation

Wang, Jiwei and Yuan, Hongqi, The Impact of Related Party Sales by Listed Chinese Firms on Earnings Informativeness and Earnings Forecasts (2012). International Journal of Business, Vol. 17, No. 3, 2012, Available at SSRN: https://ssrn.com/abstract=970873 or http://dx.doi.org/10.2139/ssrn.970873

Jiwei Wang (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore, 178900
Singapore
(65) 6828 0616 (Phone)
(65) 6828 0600 (Fax)

HOME PAGE: http://www.mysmu.edu/faculty/jwwang/

Hongqi Yuan

Fudan University - School of Management ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

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