Audit committee cash compensation and related-party transactions: the role of directors’ affiliation

Abstract

Purpose

This paper aims to investigate the relationship between the audit committee’s (AC) cash compensation and related-party transactions (RPTs). This paper also explores whether the affiliation of directors on the AC has a differential effect on the association between AC members’ cash compensation and RPTs.

Design/methodology/approach

This paper uses data from Chinese-listed firms for the period from 2007 to 2017 and use the ordinary least square regressions, to test the association between AC cash compensation and RPTs. To alleviate the endogeneity concerns, this paper applies the generalized method of moment, the two-stage least square regression technique and the Granger causality test.

Findings

This paper documents a negative association between the AC members’ cash compensation and RPTs. The findings reveal that one standard deviation increase in the AC’s cash compensation leads to around 0.08% reduction in the amount of RPTs. Further analysis shows that the cash compensation of AC independent directors is negatively associated with RPTs, whereas that of nonindependent directors shows no significant impact. The results remain robust to endogeneity tests. The results might be of interest to both practitioners as well as regulatory bodies and investors.

Originality/value

To the best of the authors’ knowledge, this study is the first to try to examine the relationship between AC cash compensation and RPTs in the context of China. This study also is the first attempt to consider the affiliation of AC directors by decomposing the AC compensation into independent and nonindependent directors. Also, it adds to the literature on the determinants of RPTs.

Citation

Alkebsee, R., Alhebry, A.A., Tiron-Tudor, A., Gubara, G.F. and Alsayegh, A. (2024), "Audit committee cash compensation and related-party transactions: the role of directors’ affiliation", Managerial Auditing Journal, Vol. 39 No. 5, pp. 522-544. https://doi.org/10.1108/MAJ-04-2023-3897