Contributions and Implications of Research

The research makes theoretical contributions and has policy implications. First, the research contributes to several streams of literature. This research contributes to EM and RPTs literature by investigating the link between them in a unique context with poor investor protection. Moreover, it contributes to corporate

governance literature and extends the literature on accounting quality. Second, this research has policy implications related to the disclosure of related parties and RPTs that would allow more transparency and protection for the investors. Theoretical contributions are discussed in Section 8.4.1 while policy implications are discussed in Section 8.4.2.

8.4.1 Theoretical Contributions

There are three main differences between the current study and related prior studies. This study differs from the studies conducted by Cheung et al. (2009), Jian and Wong (2010) and Lo et al. (2010) in the institutional setting. These studies were conducted in the Chinese context which is affected by highly concentrated ownership and the tendency for controlling shareholders to expropriate shareholders. The inferences deduced from these Chinese studies do not necessarily apply to other markets (Gordon and Henry, 2005). The vast majority of RPTs studies to date have been conducted using samples from Asian countries which exhibit a unique and different institutional setting which suggests that those results may not be generalisable to other settings (Gordon and Henry, 2005). Therefore, investigating the relationship in different settings provides a contribution to the literature by addressing this limitation.

This study also uses different measures from those adopted by Gordon and Henry (2005). I refrain from following Gordon and Henry (2005) measuring RPTs using monetary values as this includes nontrivial measurement errors (Ryngaert and Thomas, 2012). I also avoid following them in the usage of the Jones (1991)

model to estimate discretionary accruals also in an attempt to avoid or reduce measurement errors (Dechow et al., 2010). Finally, this study also differs from the study conducted by Ryngaert and Thomas (2012) which investigates whether ex-ante RPTs have a differential impact on firm value compared to ex-post RPTs in the US context. Their study relying on the historical dimension of the transaction to categorise RPTs and provides evidence from a strong investor protection environment.

This study contributes to a growing literature on EM. Prior studies have provided evidence that executives engage in EM through accruals (Healy, 1985; Healy and Whalen 1999; Kothari, 2001; Fields, 2001) or through the manipulation of real activities (Roychowdhury, 2006). Healy and Whalen (1999) argue that while RPTs could be used to manage earnings, the evidence on the link between EM when measured by an accrual based measure and RPTs is limited. This aim of this study has been to provide empirical evidence on whether RPTs are normal transactions conducted solely for normal business and corporate governance purposes, or a mask that may be used to hide the extraction of firm resources or to manipulate financial statements.

This study contributes to the corporate governance literature by examining the link between internal governance activities and EM. Although prior work has provided some evidence that corporate governance is an important determinant of EM, the results of these studies remain contradicting (Garcia-Meca and

Scanchez-Ballesta, 2009) and not sufficient to draw substantive conclusions (Larcker et al., 2007). This study provides further evidence on the association between EM and corporate governance in Greece. The results suggest that audit quality is associated with lower levels of income smoothing and hence, EM. Additionally, it shows that the negative association between EM and RPTs is robust only to the subsample of companies being audited by Big-4 firms. This indicates that audit quality plays a major role in the association between EM and RPTs.

This study also extends the literature on RPTs by examining the relationship between accounting quality and RPTs. Prior studies have investigated and found evidence of an association between earnings management and RPTs (Chen et al., 2011; Jian and Wong, 2010; Aharony et al 2010). Those studies have used indirect measures of earnings management that could not be attributed to accounting quality or financial reporting system. They used changes in ratios such as ROA or price earnings (Chen et al., 2011; Aharony et al., 2010) operating profits (Jian and Wong, 2010) as an indicator of earnings manipulation involving IPOs without investigating accounting quality attributes. Therefore, the question whether RPTs are associated with lower accounting quality was not empirically investigated by earlier studies.

Finally, prior accounting quality literature focuses almost entirely on comparing accounting quality between firms applying IFRS and their non-IFRS counterparts.

Thus, this study aims to extend the scope of accounting quality literature by examining whether RPTs are associated with lower accounting quality.

8.4.2 Policy Implications

Researchers always have to rely on information of RPTs disclosed by the firm. This implies that RPTs that are not disclosed or transactions with parties who are not known to the public or auditors remain unobserved. Although auditor failure to recognise or to disclose a related party is cited as one of the most common ten audit deficiencies, in the biggest related party transactions, namely Adelphia and Enron, the auditors were clearly aware of RPTs and related parties in these contexts (Gordon et al. 2007). These undisclosed transactions are more likely to be used for achieving private benefits by controlling shareholders as controlling shareholders are likely to be motivated to conceal their private benefits so that external shareholders do not observe those benefits. Therefore, the nature of RPTs can provide opportunities for controlling shareholders to achieve private control benefits through undisclosed RPTs. This suggests that one solution that could possibly mitigate the effect of this problem is that the regulations and accounting standards oblige auditors and not the firm, to disclose all relations and transactions with related parties they are aware of. This could help the public and the researchers to assess the degree of opportunism in the conducted RPTs.