The Impact Of Supportive Behavior Of Related– Party Transactions On Earnings Quality Of Listed Companies

The continuous development of Chinese market economy provided a good environment for listed companies and the competition among them is getting fiercer. In order to stand out from the fierce competition, how to minimise enterprise transaction costs, improve transaction efficiency and maximise enterprise benefits becomes an issue of concern by many controlling shareholders. Compared with the traditional model of market transactions, related-party transactions are preferred by major shareholders gradually because of the features of concealment and reasonable tax shield. Related-party transactions are defined as a neutral concept. Controlling shareholders could utilise related-party transactions to reduce transaction costs, improve trading efficiency thereby promote enterprise development. However, in many cases, major shareholders pursue short-term interests and ignore long-term interests of the business. As a result, the related party transactions become a tool for the transfer of the benefits of listed companies. The tunnelling behaviour and supportive behaviour are means of related-party transactions that are most commonly used by controlling shareholders. In related research of international scholars, the tunnelling behaviour of related-party transactions is often the emphasis of their study and the research literature is quite rich. Nevertheless, the supportive behaviour of related-party transactions did not receive enough attention from scholars. Generally it is studied as an assisted part of the tunnelling behaviour. There are few sole studies for the supportive behaviour.This paper analyses and explains the adverse effects of controlling shareholders’ supportive behaviours on earnings quality of listed companies by using the impact of supportive behaviour of related-party transactions on earnings quality of listed companies as the research theme, applying transaction cost theory, agency theory and behavioural financial theory as the theoretical basis, choosing the supportive behaviour of Zixin Pharmaceutical Company as the case study, utilising research method of case analysis to calculate changes of earnings quality indicators on cash-ensurence, persistence and growth of earnings before and after supportive behaviour based on relevant research data, and organising various data.Through the case study, the paper draws the following conclusions: Firstly, controlling shareholders’ supportive behaviours could promote operating performance and operating profit of listed companies rapidly in a short-term, which plays a positive role in improving enterprise image and broadening funding sources and is helpful for listed companies’ short-term development. Secondly, the controlling shareholders’ supportive behaviours for listed companies could not help companies to get rid of the financial crisis. The majority of income brought from supportive behaviours is receivables or inventories which have low liquidity and could not form corresponding cash flows. However, in the capital market in which "cash is king" is the principle, cash flow is like the blood of listed companies and the income without the support of cash flow is unvalued. Therefore supportive behaviours could only bring inflated profit and decorated financial statements for companies, and cannot ease the financial stress of enterprises. Once the capital chain of enterprise breaks, the good profit data on the books will also be difficult to carry on. Thirdly, controlling shareholders’ supportive behaviours have adverse effects on earnings quality of listed companies. The implementation of supportive behaviour could obviously reduce cash-ensurence, persistence and growth of earnings of earnings quality. In regard of the motivation of supportive behaviour, the actual intention of controlling shareholders supporting listed companies is not for the sake of enterprise development but their own interests, which also determines the inevitability that supportive behaviours would adversely affect earnings quality. Consequently, although the supportive behaviours could promote the rapid development of listed companies in a short-term, it is detrimental for companies’ future benefits. The supportive behaviours of related-party transactions could not only bring about loss to listed companies, but have negative impact on companies’ image and reputation.After summarising enlightenment on the supportive behaviour of related-party transactions through the case study, the paper presents relevant suggestions from the perspective of the controlling shareholders, listed companies, relevant audit institutions, and from the view of promoting earnings quality of listed companies then finally put forward future research prospects.