Public Communication of Audit Risks and Related-Party Transactions: Evidence from China

SUMMARY This paper examines whether and how firms’ engagement in related-party transactions (RPTs) is shaped by public communication of audit risks as required the expanded report. Using phased regulatory changes China a difference-in-differences design with firm fixed effects matching, we find that firms significantly reduce their RPTs after adoption reports (EARs). To investigate potential mechanisms, (1) investor scrutiny increases EARs, (2) reduction more pronounced when EARs are likely to attract attention, (3) weaker less concerned about scrutiny. The results suggest can increase possible penalty associated self-dealing, thus motivating RPTs. Data Availability: available from sources cited text. JEL Classifications: G30; G34; G38; M10; M16; M40; M41; M42: M48.