The Moderating Effect of Ownership Structure on the Relationship between Related Party Transactions and Earnings Quality: Evidence from Saudi Arabia

Abstract

This paper seeks to investigate how earnings quality is affected by related party transactions (RPTs). The research also examines the impact of ownership structure as a moderating variable on this relationship. Panel data with the firm fixed effects model are utilized in the paper. A sample of 91 non-financial companies listed on the Saudi Stock Exchange between 2018 and 2022 were included, resulting in 429 observations of company performance over that time period. This paper finds that there is a negative association between RPTs and earnings quality. Furthermore, the study found that the adverse effect of RPTs on earnings quality is intensified when there is managerial ownership and institutional ownership as moderating variables. The study’s conclusions are robust and reliable, as the sensitivity analysis results reinforce those of the basic analysis. To the authors’ knowledge, there is relatively little available evidence on the connection between RPTs and their correlation with earnings quality, particularly in the context of ownership structure acting as a moderating variable. Moreover, the study’s findings hold important implications for enhancing earnings quality in developing economies. To the authors’ knowledge, no studies have been conducted in Saudi Arabia thus far to investigate the impact of ownership concentration, institutional ownership, managerial ownership, foreign ownership, and state ownership on the association between RPTs and earnings quality. Therefore, this paper expands the literature by modeling how the interaction between ownership structure and related party transactions may influence earnings quality. In this way, the authors contribute to the body of knowledge by unveiling a more robust control mechanism, particularly in developing economies with ineffective markets for corporate control.

1. Introduction

Concerning the importance of studying related party transactions (RPTs), financial scandals in the United States of America have led researchers, standard-setters, regulators, and users of financial reports to show a keen interest in this topic since the early twenty-first century. One of these scandals is the case of Enron Company, an American energy firm. In 2001, a revelation emerged indicating that CEOs were promoting inflated earnings beyond the actual company profits by leveraging stock options, special purpose entities, and RPTs (Green et al. 2018). TYCO Company, a multinational corporation that provides various products and services, has been involved in another financial scandal. Liu et al. (2020) revealed the discovery of unauthorized bonuses, undisclosed RPTs, secret loans, and manipulation of stock trading.

The importance of earnings quality emerged after the occurrence of many global financial crises and the exposure of many major companies to scandals, such as the case of Enron Company. Many financial and investment decisions depend on earnings quality. The higher the quality of earnings, the higher the confidence of investors (Abd Alhadi et al. 2020).

Numerous studies have explored the relationship between RPTs and earnings quality. For instance, Munir (2010), Saleh et al. (2013), El-Helaly (2016), Hasnan et al. (2016), Mohammed and Abibakar (2018), Rahmat et al. (2020), and Yunus and Sutrisno (2022) all conducted research on this topic. The findings of previous studies have varied, with Munir (2010), Hasnan et al. (2016), Rahmat et al. (2020), and Yunus and Sutrisno (2022) indicating a negative relationship between RPTs and earnings quality. In contrast, Mohammed and Abibakar (2018) found a positive relationship, while Saleh et al. (2013) reported an insignificant relationship between the two variables. The research suggests that a higher volume of RPTs may have a negative impact on earnings quality. Consequently, the quality of earnings can be affected by such transactions.

The ownership structure of a company refers to the identities of its shareholders and the size of their shareholdings. This structure is a significant variable that can have a major impact on the company’s performance. A distinction can be made between two types of ownership structures in firms: the concentrated ownership structure, which refers to the situation where a limited number of shareholders hold a significant portion of the company’s ownership, and the dispersed ownership structure, which refers to a situation where a company has a significant number of shareholders, and each shareholder possesses a relatively small number of shares to ensure that their ownership does not exceed 5% of the company’s total stocks (Choi 2018).

Several studies (e.g., Hashim and Devi 2008; Ji et al. 2015; Kim and An 2019; Abd Alhadi et al. 2020; Oyebamiji 2021) investigate how earnings quality is affected by RPTs. Previous studies have generally agreed that there is a positive association between earnings quality and ownership structure. Moreover, Ferdi and Rossieta (2019) investigate the association between institutional ownership structure and RPTs, finding that institutional ownership positively influences disclosures of RPTs. Haji-Abdullah and Wan-Hussin (2015) conducted a study on the impact of RPTs on earnings management, which found that RPTs can worsen earnings management practices, implying that companies engaging in such transactions may be more likely to manipulate their earnings to present a favorable financial picture.

Two main factors serve as the driving forces behind this study on the relationship between RPTs and earnings quality in Saudi Arabia. First, there is a scarcity of studies examining how RPTs affect earnings quality in the Saudi Arabian context. Second, the outcomes of earlier investigations (e.g., Munir 2010; Saleh et al. 2013; El-Helaly 2016; Hasnan et al. 2016; Mohammed and Abibakar 2018; Rahmat et al. 2020; Yunus and Sutrisno 2022) have shown contradictory empirical data on how earnings quality is affected by RPTs. Given that Saudi Arabia is a developing nation with distinct business environments that differ from those in developed countries, it is important to address this issue and contribute to the understanding of the RPT–earnings-quality relationship in the Saudi Arabian context.

Taking the aforementioned factors into consideration, the research problem can be defined or expressed in two research questions: (1) To what extent do RPTs affect the quality of earnings? (2) How does ownership structure moderate the association between earnings quality and RPTs? The main aim of this paper is to examine the potential influence of RPTs on earnings quality. Furthermore, the study aims to assess whether the ownership structure of companies listed on the Saudi Stock Exchange affects the strength and character of the link between RPTs and earnings quality.

From an academic perspective, the significance of this study lies in its endeavor to determine the consequences of RPTs on the quality of earnings. Moreover, this research aims to evaluate the extent to which the ownership structure acts as a moderating factor in this association, specifically for companies that are listed on the Saudi Stock Exchange. Research in this area is not widely conducted in Saudi Arabia. The practical significance of this study lies in its potential to provide advantages to the capital market, investors, and other stakeholders, as well as in other countries that exhibit a comparable business setting. This is achieved by examining the impact of RPTs on earnings quality and providing insights into their influence. Consequently, this study’s significance also rests in its capacity to illuminate the consequences of RPTs, which may aid in making well-informed decisions for businesses and investors.

This study contributes to the literature in several ways. Firstly, the research considers related party transactions and how they may influence earnings quality, contributing to the ongoing debates on how related party transactions determine organizational earnings quality. Secondly, this research expands the literature by modeling how the interaction between ownership structure and related party transactions may influence earnings quality. In this way, the study contributes to the body of knowledge by unveiling a more robust control mechanism, particularly in developing economies with ineffective markets for corporate control. Additionally, the empirical analysis may serve as an impetus that can provide valuable insights for stakeholders, aiding them in making informed decisions regarding their investments and operations. Therefore, the research’s significance lies in its ability to benefit various stakeholders, such as investors and regulators, by shedding light on the influence of RPTs on earnings quality.

By utilizing panel data with the firm fixed effects1 model, the findings of this research indicate that (a) RPTs significantly and adversely affect the quality of earnings, (b) the interactive impact between institutional ownership, managerial ownership, and RPTs on earnings quality is significant, and (c) the findings from the sensitivity analysis align closely with those obtained from the basic analysis.

The remainder of this paper is organized as follows. Section 2 gives a background on the subject under study. Section 3 presents a theoretical literature review. Section 4 develops the research hypotheses after conducting a review of relevant previous studies. Section 5 outlines the research design employed in the study. Section 6 discusses the findings. Section 7 summarizes and concludes the paper.

2. Background

According to Islamic principles, Saudi Arabia’s official regulations are exceedingly tight (Al-Matari et al. 2012), yet it contributes 25% of the Arab world’s GDP (Solomon 2012). Saudi Arabia is a G20 member. In accordance with the CMA’s strategic goals to regulate and develop the capital market, and in alignment with Saudi Vision 2030, the CMA Board has issued a Resolution to publish draft amendments to the definition of the term “Related Party” in the Glossary of Defined Terms Used in the Regulations and Rules of the Authority. These amendments are intended for the Rules on the Offer of Securities and Continuing Obligation, as well as the definition of the term “Related Parties” in the Corporate Governance Regulations.

Recognizing the significance of investor confidence in the growth of the Saudi capital market, the CMA is committed to enhancing all aspects that contribute to this confidence. As part of its ongoing efforts to improve and develop the regulatory environment, the CMA places great importance on ensuring the efficiency, governance, and transparency of the Saudi capital market. Accordingly, the CMA prioritizes the responsibility to review and continuously enhance the regulatory framework. It strives to adopt the highest international standards in corporate governance and promote the application of good practices in this regard. In 2005, Saudi Arabia became an active participant in the World Trade Organization (WTO), resulting in various reforms in business and legal work procedures. These changes led to the establishment of SAGIA, which aims to enhance the investment environment in Saudi Arabia by addressing and removing obstacles and shortcomings.

The Capital Market Authority improved foreign investment regulations in 2018, including lowering eligibility standards for qualified investors, their affiliated firms, portfolio management, and funds under their management. Tadawul, valued at more than USD 564 billion on the Arab stock market, provides easy access for foreign investors (Alsultan 2017). Corporate ownership in Saudi Arabia is mainly concentrated among families or the government, with family-owned enterprises constituting, according to Baydoun et al. (2013) and Albassam (2014), more than 70% of firms in Saudi Arabia, while the Saudi government accounts for approximately 30% of firms. Alfordy (2016) also supports this finding.

3. Literature Review

RPTs are described as transactions that take place between a company and parties with whom they already have a relationship, like directors, significant shareholders, board members, subsidiary companies, or members of any of these groups’ immediate families. These transactions are viewed as a way to optimize the utilization of the firm’s resources, transfer money to related parties, or carry out other dishonest acts (Anh Thu et al. 2023).

RPTs have raised concerns among regulators, standard setters, academics, and financial market participants. These transactions may not be conducted under the same conditions or at fair market prices as transactions between unrelated parties. There is a risk that RPTs can be exploited for opportunistic purposes, resulting in distortions in financial reports. These distortions can negatively affect the quality of accounting information, particularly in terms of accurate representation and reliability. Additionally, RPTs can lead to variations in profitability and stock prices, which can have a negative impact on investors’ decision-making process (Salihi et al. 2023).

According to Lin et al. (2022), there are two perspectives that can be used to understand the economic motivations for RPTs. First, in comparison to transactions between unrelated and independent parties, the efficient contracting perspective foresees a reduction in transaction costs and mitigation of transaction uncertainty resulting from information asymmetry. According to this viewpoint, related parties’ interaction and trust can lead to such reductions. RPTs are thought to improve a firm’s performance. RPTs boost the firm’s value by expanding the company’s knowledge and skills and by expressing changes in the industry. This meets the company’s economic needs. Secondly, according to the perspective of earnings management, it is assumed that a conflict of interest leads to the exploitation of the company’s resources through RPTs. Consequently, wealth expropriation occurs when managers withdraw firm resources and appropriate wealth (Lin et al. 2022).

The anticipated relationship between RPTs and earnings quality is underpinned by several theories, including the efficient contracts theory, the opportunistic behavior theory, and the signaling theory. These theories have been discussed by various researchers including Marchini et al. (2018), Lin et al. (2022), and Choi and Cho (2021). According to the efficient contracts hypothesis, separate parties have a contractual incentive to reduce agency costs by signing agreements that forbid one party from taking advantage of another. According to this view, RPTs are involved in the decision-making process, allowing users of financial statements to assess the significance of these transactions. The disclosure of RPTs serves as a mechanism for drafting contracts and evaluating their execution. Numerous studies have examined the hypotheses of this theory and have discovered that the level of RPT disclosure increases in proportion to the intensity of conflicting interests among the parties involved (Choi and Cho 2021).

According to the capture theory, it is necessary to disclose RPTs in order to advance the interests of particular groups, who require this information to further their objectives and maximize their own and their members’ benefits. These entities may employ their political influence to ensure the disclosure of the information they desire or leverage their economic power to obtain the necessary information through disclosure (Mursoi et al. 2021).

According to the opportunistic behavior theory, managers’ decisions about accounting procedures and disclosure practices are affected by their opportunistic behavior. According to this theory, RPTs give managers a way to take advantage of the resources of the organization because of conflicts of interest. RPTs are hence viewed as a type of wealth appropriation when managers use corporate assets to extract wealth. RPTs can be utilized as a mechanism by managers to manage earnings and achieve their individual objectives. As a consequence, these transactions have the potential to include the disclosure of inaccurate information and the inappropriate exploitation of corporate resources (Lin et al. 2022).

According to the stakeholder theory, a company’s responsibilities go beyond its management, owners, and creditors to encompass customers, suppliers, and other stakeholders who have a significant impact on the performance and sustainability of the business. This concept suggests that a corporation should furnish information that meets the needs of both internal stakeholders (such as management) and external stakeholders, such as shareholders, creditors, customers, banks, government organizations, and other stakeholders. Expanding disclosure standards is important to adequately meet these parties’ expectations given the variety of disclosure obligations they have for RPTs (Maglio et al. 2020).

4. Hypothesis Development

This section of the paper provides a review of previous studies that have investigated how earnings quality is affected by RPTs, followed by research that has considered ownership structure as a determinant of earnings quality. This section also explores potential moderating factors that could impact the association between RPTs and earnings quality, drawing upon relevant theories. This helps to establish a theoretical framework for the development of the research hypotheses.

4.1. Earnings Quality and RPTs

Numerous studies (e.g., Munir 2010; Saleh et al. 2013; El-Helaly 2016; Hasnan et al. 2016; Mohammed and Abibakar 2018; Rahmat et al. 2020; Yunus and Sutrisno 2022) have explored how earnings quality is affected by RPTs. The results of previous studies have varied. For example, some studies (Munir 2010; Hasnan et al. 2016; Rahmat et al. 2020; Yunus and Sutrisno 2022) indicate a negative relationship between RPTs and earnings quality. In contrast, Mohammed and Abibakar (2018) finds a positive relationship between RPTs and earnings quality, and Saleh et al. (2013) report an insignificant relationship between the two.

The detrimental effect of RPTs on the quality of earnings stems from the concern that management might exploit these arrangements for their personal benefit, which may not align with the interests of shareholders (Alsultan 2023).

In accordance with the signaling theory, businesses may be categorized into two groups: those with positive news that their management shares in order to set them apart from those with negative news, and those with negative news that their management chooses not to share. Theoretically, management has a strong incentive to share information regarding RPTs as long as it reduces information asymmetry and offers a trustworthy indication of their success (Marchini et al. 2018).

Accordingly, prior research has suggested that a higher number of RPTs could lead to a decrease in earnings quality. In line with this, the researchers of this study hypothesize that RPTs could indeed have an impact on earnings quality. This hypothesis is supported by the rationale that previous studies have already established a relationship between RPTs and the quality of earnings.

Additionally, the study contends that as a result of the disclosure obligations outlined in Article (41/6) of the Corporate Governance Regulations issued by the Saudi Capital Market Authority, companies involved in RPTs demonstrate a reduced inclination to employ earnings management techniques. This regulation mandates companies to disclose any transactions with related parties that account for 1% or more of the firm’s total revenues. The disclosure of such transactions may prompt stakeholders to closely examine the nature of these transactions, leading to increased scrutiny of the financial reporting quality.

Based on the above, the first alternative hypothesis is expressed as follows:

H₁. 

RPTs negatively affect earnings quality.

4.2. The Moderating Effect of Ownership Structure on the Association between Earnings Quality and RPTs

Regarding the analysis of the influence of ownership structure on the association between earnings quality and RPTs, several studies (e.g., Hashim and Devi 2008; Ji et al. 2015; Kim and An 2019; Abd Alhadi et al. 2020; Oyebamiji 2021) indicate that earnings quality differed among companies with different ownership structures, including institutional ownership, ownership concentration, foreign ownership, managerial ownership, and state ownership. Ferdi and Rossieta (2019) explore the relationship between RPTs and institutional ownership structure, showing there is a substantial positive relationship between RPTs and institutional ownership.

Numerous studies (e.g., Febrianto 2005; Ismail and Sinnadurai 2012; Al-Rassas and Kamardin 2015; Lyu et al. 2017; Frisenna et al. 2021; Oyebamiji 2021; Triyonowati et al. 2022; Yang et al. 2022) indicate that earnings quality varies depending on ownership concentration. Another body of literature (e.g., Abdullatif et al. 2019; Agnihotri and Bhattacharya 2019) suggests that ownership concentration may be considered a determinant of earnings quality. Agnihotri and Bhattacharya (2019) and Alhadab et al. (2020) propose that ownership concentration could be regarded as a factor that shapes RPTs.

Based on the influence of ownership structure on both earnings quality and RPTs, the researchers anticipate that the interaction between these factors and RPTs may give rise to a new interactive variable. This variable has the potential to impact the relationship under investigation. Consequently, the researchers chose to adopt a moderating approach, considering ownership structure as a moderating variable in this relationship, rather than as a control variable that directly affects the dependent variable.

Based on the findings of Alhadab et al. (2020), when companies have a significant concentration of ownership, it can result in information asymmetry among investors, particularly in countries with inadequate legal systems and limited protection for minority shareholders. This scenario creates an opportunity for dominant shareholders to exploit the situation for their personal gain and potentially engage in earnings management as a means of concealing their actions. However, an alternative perspective suggests that with dominant shareholders, there is greater control and monitoring of managers, which could reduce the pressure to achieve short-term earnings targets. Consequently, it is expected that the extent of earnings management would be lower in such cases.

Capture theory, also referred to as interest-group theory, suggests that RPTs are associated with moral hazard and are conducted by directors with the intention of diverting wealth away from shareholders. According to this theory, RPTs are seen as a means of misusing a company’s resources and distorting its internal information, which can have negative consequences for minority shareholders. These transactions can undermine management’s accountability to shareholders and the oversight role of the board of directors. Additionally, there is a risk that the company’s resources may be inappropriately taken or utilized for the benefit of the parties involved in the transactions. The occurrence of RPTs can also lead to increased agency costs. Consequently, based on capture theory or interest-group theory, it is hypothesized that changes in ownership concentration will result in corresponding alterations in earnings quality, as well as variations in the frequency and nature of RPTs.

In the context of Saudi Arabia, the ownership concentration of companies in the country signifies a significant concentration of ownership. According to Albassam (2014), more than 70% of Saudi firms are owned by families, while 30% are owned by the Saudi government. Consequently, these variations in the business environment may lead to diverse outcomes between countries, making them worthy of exploration. This is particularly relevant for informing foreign investors about the Saudi capital market.

Formulating the second alternative hypothesis, the researchers propose that the moderating variable, resulting from the interplay of ownership concentration and RPTs, is expected to influence the magnitude and/or direction of the relationship between ownership concentration and earnings quality. This hypothesis can be expressed as follows:

H₂. 

Ownership concentration moderates the relationship between RPTs and earnings quality.

Several studies (e.g., Velury and Jenkins 2006; Zhong et al. 2017; Alhadi et al. 2018; Hidayat and Utami 2022) indicated that the quality of earnings varies depending on institutional ownership. Additionally, some studies (e.g., Ferdi and Rossieta 2019; Cui 2021; Melati and Wijayanti 2022) suggest that institutional ownership may serve as a determinant of RPTs. Regarding the potential impact of institutional ownership, Alhadab et al. (2020) generally discovered that it has a positive effect on earnings quality.

Opportunistic behavior theory suggests that conflicting interests can drive individuals to exploit a company’s resources through RPTs. This behavior involves diverting resources and potentially compromising the interests of shareholders. Additionally, as noted by Lin et al. (2022), these transactions can provide managers with an opportunity to engage in earnings manipulation for their personal gain. Therefore, opportunistic behavior theory posits that changes in institutional ownership will likely result in corresponding changes in earnings quality, as well as changes in the occurrence and characteristics of RPTs.

In Saudi Arabia, the ownership structure of companies indicates a notable concentration of ownership. Over 70% of the listed companies on the Saudi stock market are accounted for by family-owned businesses, while approximately 30% are owned by the Saudi government (Albassam 2014). Given this ownership landscape, institutional ownership can play a role in influencing earnings quality. Consequently, it can also impact the use of RPTs (related-party transactions) as a tool for engaging in earnings management practices.

In light of these findings, the researchers of this study propose that the interaction between institutional ownership and RPTs results in the formulation of a third alternative hypothesis. They posit that RPTs have the potential to create a moderating variable that is anticipated to influence the magnitude and/or direction of the aforementioned relationship. The third hypothesis can be formulated as follows:

H₃. 

Institutional ownership moderates the relationship between RPTs and earnings quality.

According to various studies (e.g., Khafid and Arief 2017; Hapsoro and Shufia 2018; Hatane et al. 2019), it has been demonstrated that earnings quality varies depending on managerial ownership. Moreover, Haji-Abdullah and Wan-Hussin (2015) suggest that managerial ownership could be a factor influencing RPTs (related-party transactions).

Stakeholder theory suggests that a company has the responsibility to provide information that fulfills the requirements of diverse parties, encompassing management and external stakeholders such as shareholders, creditors, customers, banks, government agencies, and other relevant entities. According to Maglio et al. (2020), these stakeholders possess distinct motivations for seeking the disclosure of RPTs (related-party transactions), and as a result, a company must expand its focus to accommodate these diverse requirements. In accordance with stakeholder theory, it is hypothesized that changes in managerial ownership will be linked to corresponding changes in the quality of earnings. Additionally, stakeholder theory suggests that changes in institutional ownership can also impact the frequency and nature of RPTs.

In Saudi Arabia, the ownership structure of companies reveals a significant concentration of ownership. More than 70% of the companies listed on the Saudi stock market are represented by family-owned businesses, while around 30% are owned by the Saudi government (Albassam 2014). In this context, managerial ownership can have an impact on earnings quality. Moreover, it can also influence the utilization of RPTs (related-party transactions) as a means of practicing earnings management.

Based on these findings, the formulation of a fourth alternative hypothesis is motivated by the potential for RPTs (related-party transactions) to create a moderating variable that is anticipated to affect the magnitude and/or direction of the aforementioned relationship. The fourth hypothesis can be expressed as follows:

H₄. 

Managerial ownership moderates the relationship between RPTs and earnings quality.

Several studies (e.g., Ben-Nasr et al. 2015; Hoang et al. 2019; Kim and An 2019; Vo and Chu 2019) indicate that earnings quality varies based on foreign ownership. Additionally, Shan (2019) suggests that foreign ownership may serve as a determinant of RPTs (related-party transactions).

According to the opportunistic behavior theory, RPTs (related-party transactions) can be utilized by individuals to exploit a company’s resources as a result of conflicting interests. This behavior involves diverting resources. Furthermore, as indicated by Lin et al. (2022), these transactions can provide managers with opportunities to manipulate earnings for their personal advantage through the manipulation of RPTs. Therefore, based on opportunistic behavior theory, it is hypothesized that changes in foreign ownership will lead to corresponding changes in the quality of earnings. Additionally, there can be variations in the frequency and characteristics of RPTs.

In Saudi Arabia, the ownership structure of companies demonstrates a substantial concentration of ownership. According to Albassam (2014), family-owned companies make up more than 70% of the companies listed on the Saudi stock market, with the remaining approximately 30% being owned by the Saudi government. Within this context, foreign ownership can have implications for earnings quality. Furthermore, it can also affect the usage of RPTs (related-party transactions) as a method of conducting earnings management.

In light of these findings, the researchers of this study propose the formulation of a fifth alternative hypothesis. They suggest that the interaction between foreign ownership and RPTs (related-party transactions) may give rise to a moderating variable that is anticipated to impact the magnitude and/or direction of the aforementioned relationship. The fifth hypothesis can be expressed as follows:

H₅. 

Foreign ownership moderates the relationship between RPTs and earnings quality.

Finally, various studies (e.g., Ben-Nasr et al. 2015; Gaio and Pinto 2018; Tam et al. 2019; Hidayah et al. 2021) suggest that the quality of earnings varies based on state ownership. Similarly, other studies (e.g., Wan and Wong 2015; Mai 2022; Nguyen et al. 2022) propose that state ownership may be considered a determinant of RPTs (related-party transactions).

Capture theory, also known as interest-group theory, posits that RPTs (related-party transactions) are linked to moral hazard. It suggests that such transactions are conducted by directors with the intention of diverting wealth away from shareholders. From this perspective, RPTs are perceived as a way to misuse a company’s resources and manipulate its internal information. Consequently, these actions can have adverse effects on minority shareholders. RPTs can undermine management’s accountability to shareholders and the supervisory role of the board of directors. Additionally, there is a risk of improper use of the company’s resources for the benefit of the parties involved in the transactions. The presence of RPTs can result in higher agency costs. Drawing upon capture theory or interest-group theory, it is hypothesized that changes in the concentration of state ownership will correspond to changes in earnings quality, as well as variations in the occurrence and characteristics of RPTs.

In Saudi Arabia, the ownership structure of companies exhibits a significant concentration, with family-owned businesses representing over 70% of the listed companies on the Saudi stock market and approximately 30% being owned by the Saudi government (Albassam 2014). Within this context, state ownership can indeed have implications for earnings quality. Furthermore, it can also affect the utilization of RPTs (related-party transactions) as a means of conducting earnings management practices.

The researchers of this study formulate a sixth alternative hypothesis, asserting that the interaction between state ownership and RPTs (related-party transactions) can serve as a moderating variable that is anticipated to impact the magnitude and/or direction of the previously mentioned relationship. This can be expressed as follows:

H₆. 

State ownership moderates the relationship between RPTs and earnings quality.

5. Research Design

This section of the paper presents the empirical testing of the research hypotheses to determine whether RPTs have an impact on earnings quality and whether ownership structure interacts with RPTs to affect earnings quality. The measurement of variables and the estimation models used for testing the hypotheses in our study are described in the subsequent subsections.

5.1. Specification of the Research Models

Through the empirical investigation of the hypotheses in our paper, it was discovered that the main independent variable in the study is RPTs, which are expected to influence the quality of earnings. It is anticipated that the influence of RPTs on the quality of earnings will be moderated by ownership concentration, leading to the moderation model illustrated in Figure 1.

5.2. RPTs and Earnings Quality Model

In order to empirically examine the first research hypothesis, the development of the regression model outcome is as follows:

EQ_(it) = β₀ + β₁RPT_(it) + β₂FS_(it) + β₃LEV_(it) + β₄ROA_(it) + β₅GROWT_(it)
+ β₆LOSS_(it) + β₇∑year_(it) + β₈∑Sector_(it) + ε_(it)

(1)

where

EQ(it):	Earnings quality of firm (i) in financial year (t);
RPT(it):	Related party transactions of firm (i) in financial year (t);
FS(it):	Firm size of firm (i) in financial year (t);
LEV(it):	Leverage ratio of firm (i) in financial year (t);
ROA(it):	Return on assets of firm (i) in financial year (t);
GROWT(it):	Sales growth of firm (i) in financial year (t);
LOSS(it):	A dummy variable that equals 1 if the firm reports a loss and zero otherwise;
year(it)	A vector of year indicator variables for 2018, 2019, 2020, 2021, and 2022 is included;
Sector(it)	A sector indicator vector is created by classifying the Saudi Stock Exchange.

5.3. Ownership Structure Moderating Model

To test the second to sixth research hypotheses, which examine the moderating influence of institutional ownership, ownership concentration, foreign ownership, managerial ownership, and state ownership on the association between earnings quality and RPTs.

To empirically examine or evaluate Hypothesis 2, the following multiple regression model is estimated:

EQ_(it) = β₀ + β₁RPT(it) + β₂Own.C_(it) + β₃RPT*Own.C_(it−1) + β₄FS_(it) + β₅Lev_(it)
+ β₆ROA_(it) + β₇GROWT_(it) + β₈LOSS_(it) + β₉∑year_(it) + β₁₀∑Sector_(it) + ε_(it)

(2)

where Own.c_(it) represents the ownership concentration of firm (_i) in financial year (_t); RPT*Own.C is the interaction between RPTs and ownership concentration.

To test the third research hypothesis, the subsequent regression model is developed:

EQ_(it) = β₀ + β₁RPT(it) + β₂Inst.Own_(it) + β₃RPT*Inst.Own_(it) + β₄FS_(it) + β₅Lev_(it)
+ β₆ROA_(it) + β₇GROWT_(it) + β₈LOSS_(it) + β₉∑year_(it) + β₁₀∑Sector_(it) + ε_(it)

(3)

where Inst.Own_(it) denotes the institutional ownership of firm (_i) in financial year (_t); RPT*Inst.Own is the interaction between RPTs and institutional ownership.

To test the fourth research hypothesis, the subsequent regression model is developed:

EQ_(it) = β₀ + β₁RPT(it) + β₂Manag.Own_(it) + β₃RPT*Manag.Own_(it) + β₄FS_(it) + β₅LEV_(it)
+ β₆ROA _(it) + β₇GROWT_(it) + β₈LOSS_(it) + β₉∑year_(it) + β₁₀∑Sector_(it) + ε_(it)

(4)

where Manag.Own_(it) represents the managerial ownership of firm (_i) in financial year (_t); RPT*Manag.Own is the interaction between RPTs and managerial ownership.

To test the fifth research hypothesis, the subsequent regression model is developed:

EQ_(it) = β₀ + β₁RPT(it) + β₂ForeignOwn_(it) + β₃RPT*ForeignOwn_(it) + β₄FS_(it) + β₅LEV_(it)
+ β₆ROA_(it) + β₇GROWT_(it) + β₈LOSS_(it) + β₉∑year_(it) + β₁₀∑Sector_(it) + ε_(it)

(5)

where ForeignOwn_(it) signifies the foreign ownership of firm (_i) in financial year (_t); RPT*ForeignOwn is the interaction between RPTs and foreign ownership.

To test the sixth research hypothesis, the subsequent regression model is developed:

EQ_(it) = β₀ + β₁RPT(it) + β₂StateOwn_(it) + β₃RPT*StateOwn_(it) + β₄FS_(it) + β₅LEV_(it)
+ β₆ROA_(it) + β₇GROWT_(it) + β₈LOSS_(it) + β₉∑year_(it) + β₁₀∑Sector_(it) + ε_(it)

(6)

where StateOwn_(it) denotes the state ownership of firm (_i) in financial year (_t); RPT*StateOwn is the interaction between RPTs and state ownership.

5.4. Sample Selection

After excluding financial institutions such as banks and insurance companies, the study’s initial sample consisted of all non-financial firms listed on the Saudi Exchange between 2018 and 2022. The sample eliminates the financial sector since its regulation and governance are overseen by the Saudi Central Bank and adhere to potentially distinct financial reporting practices. According to Hashed and Almaqtari (2021), the implementation of International Financial Reporting Standards (IFRS) has a notable negative impact on the tendency of firms listed on the Saudi Stock Exchange to engage in earnings management practices. Consequently, the study period commenced in 2018 to eliminate any earnings management magnitude that may have resulted from the use of Saudi national accounting standards. The criteria for the selection of the research sample were as follows: (1) the firms selected for the study sample were those included in the listings of the Saudi Stock Exchange; (2) the study sample consisted of firms that had their annual financial reporting available for the entire duration of the study period; and (3) each sector needed to have at least six observations (Huang et al. 2020).

Table 1. Sample selection.

Sectors	Sample Firms	%
Materials	28	30.7
Food and Staples Retailing	6	6.6
Capital Goods	12	13.2
Retailing	8	8.8
Health Care	7	7.7
Consumer Services	8	8.8
Food and Beverages	8	8.8
Real Estate Management and Development	8	8.8
Consumer Durables and Apparel	6	6.6
Total	91	100

displays the final sample selected for the study. Firms in financial-services-related sectors and those that did not meet the aforementioned criteria were excluded from the study. Consequently, data were gathered from a total of 91 firms, which represented nine sectors. The selection of sectors was based on data availability. The sample included 429 firm-year observations spanning the period from 2018 to 2022.

5.5. Measurement of The Variables

5.5.1. Dependent Variable

The dependent variable is earnings quality. It is measured by real earnings management (Alhadab et al. 2020; Yunus and Sutrisno 2022). The first proxy is abnormal operating cash flows (ABNOCF). The second proxy is abnormal discretionary expenses (ABNDEXP). The third surrogate of real earnings management is production cost (ABNPROD).

$$\begin{array}{l}\frac{OCFi,t}{ASSETSi,t-1}={\mathsf{\alpha }}_0+{\mathsf{\beta }}_1\frac{1}{ASSETSi,t-1}+{\mathsf{\beta }}_2\frac{SALESi,t}{ASSETSi,t-1}+{\mathsf{\beta }}_3\frac{\mathsf{\Delta }SALESi,t}{ASSETSi,t-1}+\mathsf{\epsilon }\\ \frac{DISXi,t}{ASSETSi,t-1}={\mathsf{\alpha }}_0+{\mathsf{\beta }}_1\frac{1}{ASSETSi,t-1}+{\mathsf{\beta }}_2\frac{SALESi,t}{ASSETSi,t-1}+\mathsf{\epsilon }\\ \frac{PRODCSTi,t}{ASSETSi,t-1}={\mathsf{\alpha }}_0+{\mathsf{\beta }}_1\frac{1}{ASSETSi,t-1}+{\mathsf{\beta }}_2\frac{SALESi,t}{ASSETSi,t-1}+{\mathsf{\beta }}_3\frac{\mathsf{\Delta }SALESi,t}{ASSETSi,t-1}+{\mathsf{\beta }}_4\frac{\mathsf{\Delta }SALESi,t-1}{ASSETSi,t-1}+\mathsf{\epsilon }\end{array}$$

where

OCFi,t	cash flows from operating;
SALESi,t	sales in financial year (t);
SALESi,t−1	sales in financial year (t−1);
DISXit	sum of Research and Development expenses and advertising expenses for firm (i) in financial year (t);
PRODCSTi,t	cost of goods sold and change in inventories.

5.5.2. Independent Variable

There are many ways to measure RPTs, as they can be measured through several methods, including the following: the number of transactions with related parties, or the total absolute value of disclosed related party transactions (Chen et al. 2011); the natural logarithm of the total value of transactions with related parties (Nekhili and Cherif 2011); dividing the total value of transactions with disclosed related parties by the company’s total assets (Widari et al. 2013); giving the value (1) in the case of transactions with related parties disclosed in the financial report, and the value (0) otherwise (Kohlbeck and Mayhew 2010); or giving the value (1) in the case of a company that has total transactions with related parties disclosed in the financial report amounting to greater than 1% of the total assets, and taking the value (0) in the case of a company that has total transactions with related parties that amount to less than 1% of total assets (Saleh et al. 2013). For fundamental analysis purposes, the value of RPTs is measured by taking the natural logarithm of RPTs, as stated by Rasheed and Mallikarjunappa (2018).

5.5.3. Moderating Variable

The moderating variable is the interaction of the RPTs and ownership structure. The percentage of shares held by the largest shareholder serves as a proxy for ownership concentration (Yang et al. 2022). Institutional ownership is measured by the proportion of shares held by institutional shareholders to total company shareholding (Mwangi and Nasieku 2022). The ratio of shares held by senior management to all outstanding shares of the company is used to determine managerial ownership (Mwangi and Nasieku 2022). The percentage of shares held by foreign investors is used to determine foreign ownership (Tran and Dang 2021). The percentage of shares held by state shareholders is used to calculate state ownership (Tran and Dang 2021).

5.5.4. Control Variables

The natural logarithm of total assets can be used to calculate firm size (Yang et al. 2022). The leverage ratio can be measured by the debt ratio (Yang et al. 2022). Net income divided by total assets can be used to measure return on assets (Yang et al. 2022). The growth rate is calculated as (Revenuet—Revenue_t−1)/Revenue_t−1 (Tran and Dang 2021). The indicator variable “loss” takes a value of 1 if the firm reports a loss and 0 if it does not (Alhadab et al. 2020).

Table 2. Measurement of variables.

Variable	Type (Predicted Sign)	Measurement
Earnings Quality (EQ)	Dependent	Earnings quality, which is proxied by real earnings management (Alhadab et al. 2020).
Related Party Transactions (RQ)	Independent (−)	The natural logarithm of the RPTs value can be used as a measure (as indicated by Rasheed and Mallikarjunappa 2018).
Ownership Concentration (Own.C)	Moderating (+/−)	Measured by the shareholding ratio of the biggest shareholder (Yang et al. 2022).
Institutional Ownership (Inst.Own)	Moderating (+/−)	Measured as the proportion of institutional shareholders’ shares to the total number of shares owned by the company (Mwangi and Nasieku 2022).
Managerial Ownership (Manag.Own)	Moderating (+/−)	Determined by the ratio of top management’s shareholdings to the total number of shares in the company (Mwangi and Nasieku 2022).
Foreign Ownership (ForeignOwn)	Moderating (+/−)	The percentage of shares held by foreign investors served as a proxy for foreign ownership, as suggested by Tran and Dang (2021).
State Ownership (StateOwn)	Moderating (+/−)	The percentage of shares held by state shareholders was used to calculate the level of state ownership, as proposed by Tran and Dang (2021).
Firm Size (FS)	Control +/−	Measured by the natural logarithm of total assets, as suggested by Yang et al. (2022).
Leverage (Lev)	Control +/−	The debt-to-assets ratio is used as the measurement for this variable, according to Yang et al. (2022).
Return on Assets (ROA)	Control +/−	The net income divided by total assets is utilized as the measurement for this variable, as indicated by Yang et al. (2022).
Growth Rate (GROWT)	Control +/−	Calculated as (Revenuet—Revenuet−1)/Revenuet−1 (Tran and Dang 2021).
Loss (LOSS)	Control +/−	According to Alhadab et al. (2020), a dummy variable is generated whereby a value of 1 is assumed if a loss is reported by the company, and 0 is assumed otherwise.

offers a summary of the key variables investigated in the research, along with the measurement method used for each variable.

6. Empirical Results and Discussion

Descriptive statistics for the research variables employed in the regression models are included in the Section 6.

6.1. Descriptive Statistics

The descriptive statistics of all the variables utilized in the analysis are showcased in

Table 3. Descriptive statistics.

Variable	Min.	Max.	Mean	Std. Deviation
ABNOCF	−0.29617798	0.2673045	0.0010040	0.06639937168
ABNDEXP	−0.1948579	0.2284433	0.0006897	0.0587855289
ABNPROD	−0.25691867	0.4865030	0.0018222	0.07203941897
RPT	0	10	5.24	3.622
FS	1.869800625	5.014258	3.245090	0.617518587410
LEV	0.008175100	0.9250932	0.3894322	0.245349791044
ROA	−0.367729175	0.2508269	0.0131640	0.092609124216
GROWT	−0.999955830	35.11753	0.1161195	1.73371403839
LOSS	0	1	0.34	0.474
Own.C	0.0000	0.7192	0.099202	0.1434468
Inst.Own	0	22	0.19	1.059
Manag.Own	0.0000000	6.046540	0.1124552	0.4328594002
ForeignOwn	0.0000	0.1770	0.040324	0.0398919
StateOwn	0.0000	0.8430	0.054275	0.1452038
N = 429

. The mean values of the variables, as shown in the table, indicate their average values are in proximity to both the minimum and maximum values. The absence of atypical values and the heterogeneity of the data are suggested by these findings.

The study’s correlations among the variables are presented in

Table 4. Pearson correlation coefficients.

Correlation	ABNOCF	ABNDEXP	ABNPROD	RPT	FS	LEV	ROA	GROWT	LOSS	Own.C	Inst.Own	Manag.Own	ForeignOwn	StateOwn
ABNOCF	1
ABNDEXP	0.320 **	1
ABNPROD	0.439 **	0.532 **	1
RPT	0.468 **	0.468 **	0.513 **	1
FS	0.049	0.029	0.005	0.207 **	1
LEV	−0.306 **	−0.122 *	−0.121 *	−0.024	0.183 **	1
ROA	0.295 **	−0.070	−0.048	0.146 **	0.352 **	−0.239 **	1
GROWT	0.007	0.010	0.016	0.016	0.039	−0.029	0.180 **	1
LOSS	−0.184 **	0.012	0.039	−0.114 *	−0.228 **	0.253 **	−0.688 **	−0.089	1
Own.C	−0.022	−0.099 *	−0.168 **	−0.036	−0.146 **	0.137 **	0.079	−0.038	−0.072	1
Inst.Own	0.243 **	0.075	0.102*	0.142 **	−0.051	0.057	0.063	−0.007	−0.061	0.019	1
Manag.Own	−0.303 **	−0.217 **	−0.349 **	−0.137 **	−0.028	0.128 **	0.019	−0.019	0.047	0.198 **	−0.009	1
ForeignOwn	0.127 **	0.072	0.042	0.173 **	0.414 **	0.004	0.291 **	−0.003	−0.196 **	−0.047	−0.014	−0.075	1
StateOwn	−0.248 **	−0.235 **	−0.432 **	−0.399 **	0.040	0.015	0.083	−0.012	−0.030	−0.064	−0.054	0.404 **	−0.030	1
N = 429

** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

. The level of correlation between the independent variables was determined by researchers using the Pearson correlation coefficient. When the correlation coefficient between two independent variables is lower than 0.7, it shows a weak correlation, which implies that there are no issues with multicollinearity. This information can be inferred from the data presented in the study’s Table 4. Based on the correlation coefficients presented in the sample’s Table 4, all the correlations among the independent variables are below 0.5. This finding suggests that there is no indication of multicollinearity among the variables.

6.2. Empirical Results

The next subsections show the empirical findings of the estimated models, which were employed to evaluate the research hypotheses.

The findings of the panel regression with the firm fixed effects model, which are summarized in

Table 5. Relationship between RPTs and earnings quality.

Panel A: Dependent Variable Is ABNOCF	β	p-Value
RPT	0.00694	0.00031
FS	−0.036	0.236
LEV	0.00915	0.731
ROA	0.0734	0.0451
GROWT	0.000234	0.820
LOSS	−0.007	0.231
R2	0.068
Sig.	0.000
N	429
Panel B: Dependent Variable Is ABNPROD	Β	p-Value
RPT	0.00678	0.00586
FS	−0.237	0.193
LEV	−0.458	0.338
ROA	0.281	0.344
GROWT	−0.234	0.0595
LOSS	0.00506	0.440
R2	0.046
Sig.	0.0149
N	429
Panel C: Dependent Variable Is ABNDEXP	β	p-Value
RPT	0.000103	0.017
FS	−0.00973	0.0205
LEV	0.00781	0.0464
ROA	0.014	0.00865
GROWT	0.000341	0.0251
LOSS	−0.0000733	0.933
R2	0.050
Sig.	0.009
N	429

Notes: This table displays the results of statistical analyses that investigated the correlation between RPTs and earnings quality.

, examine the impact of RPTs on earnings quality, which is measured by real earnings management. Panels A, B, and C of Table 5 describe the findings on the relationship between RPTs and real earnings management, indicating that RPTs have a significant and positive impact on ABNOCF, ABNDEXP, and ABNPROD. As a result, it can be concluded that RPTs have a significant and negative impact on earnings quality. Moreover, the results provide support for H1, which posits that RPTs have an impact on earnings quality. These findings are in line with prior research conducted in the field that has demonstrated a significant and negative association between earnings quality and RPTs (e.g., Munir 2010; Hasnan et al. 2016; Rahmat et al. 2020; Yunus and Sutrisno 2022). In contrast, the results of this study differ from both Mohammed and Abibakar (2018) and Saleh et al. (2013). While Mohammed and Abibakar (2018) found a positive relationship between RPTs and earnings quality, Saleh et al. (2013) reported an insignificant relationship in their study.

The results of this study are consistent with the signaling theory, as noted by Marchini et al. (2018). This suggests that company managers are highly motivated to disclose information about RPTs to reduce information asymmetry and establish a dependable measure of the firm’s performance. Table 5 presents the outcomes, which disclose a significant and positive correlation between ROA and earnings quality. Additionally, the findings indicate a significant and negative association between the leverage ratio and earnings quality.

In conclusion, the results of this paper support the objective of RPT disclosures as outlined in IAS 24, which is practical in Saudi Arabia. According to IAS 24, a related party relationship can affect the financial position and performance of companies. One possible explanation for the influence of RPTs on the quality of earnings is that majority shareholders may derive benefits from engaging in transactions with the firm that could potentially damage minority shareholders. Thus, this could have a negative influence on earnings quality.

The primary aim of examining the second hypothesis is to explore how the association between RPTs and earnings quality is influenced by ownership concentration. The outcomes of the panel regression with firm fixed effects, presented in

Table 6. Ownership concentration moderating model in regression.

Panel A: Dependent Variable Is ABNOCF	β	p-Value
RPT	0.00597	0.00264
Own.C	−0.0000419	0.999
RPT*Own.C	0.0113	0.126
FS	−0.0366	0.226
LEV	0.0128	0.630
ROA	0.0721	0.0489
GROWT	0.000245	0.811
LOSS	−0.00542	0.355
R2	0.082
Sig.	0.0004
N	429
Panel B: Dependent Variable Is ABNPROD	β	p-Value
RPT	0.00687	0.00722
Own.C	0.00100	0.987
RPT*Own.C	−0.00121	0.899
FS	−0.182	0.283
LEV	−0.508	0.287
ROA	−0.113	0.733
GROWT	−0.0209	0.0397
LOSS	0.00450	0.499
R2	0.046
Sig.	0.0467
N	429
Panel C: Dependent Variable Is ABNDEXP	β	p-Value
RPT	0.0832	0.0288
Own.C	−0.0247	0.469
RPT*Own.C	−0.0001	0.985
FS	0.271	0.00162
LEV	−0.0296	0.115
ROA	−0.0375	0.146
GROWT	−0.00247	0.616
LOSS	0.00115	0.791
R2	0.051
Sig.	0.0259
N	429

Notes: This table presents the results of statistical analyses that examined the moderating effect of ownership concentration on the relationship between RPTs and earnings quality.

, show that the p-value of the model is below the accepted significance level of 0.05, indicating that the results are statistically significant. This confirms the model’s validity in examining the association under investigation. By incorporating ownership concentration as a moderating variable with RPTs, the regression coefficients demonstrate a variance in the direction of the influence of RPTs. Furthermore, the interaction of RPTs * ownership concentration has a statistically significant p-value greater than 0.05. Consequently, the alternative hypothesis (H2) is rejected, and the null hypothesis is supported, as summarized in Panels A, B, and C of Table 6.

The findings of this study support the capture theory, which suggests that RPTs are associated with moral hazard and are conducted to benefit company directors at the expense of shareholders. RPTs are thought to function as a means to capitalize on a company’s resources and manipulate privileged information, leading to adverse consequences for minority shareholders. The presence of such transactions has the potential to erode the accountability of management toward shareholders and the oversight role of the board of directors. The occurrence of RPTs heightens the risk of misappropriating or diverting the company’s resources to the benefit of the parties involved. Moreover, the findings of the analysis, as depicted in Table 6, reveal a significant and positive correlation between ROA and earnings quality. Furthermore, the results suggest a significant and negative association between the leverage ratio and earnings quality.

The primary aim of testing the third hypothesis is to investigate the impact of institutional ownership on the relationship between RPTs and earnings quality. The outcomes of the panel regression with firm fixed effects analysis, as displayed in

Table 7. Institutional ownership moderating model in regression.

Panel A: Dependent Variable Is ABNOCF	β	p-Value
RPT	0.00701	0.000237
Ins.Own	0.119	0.00353
RPT*Ins.Own	−0.0152	0.00310
FS	−0.0457	0.131
LEV	0.0185	0.487
ROA	0.0768	0.0341
GROWT	0.000279	0.784
LOSS	−0.00586	0.312
R2	0.094
Sig.	0.0001
N	429
Panel B: Dependent Variable Is ABNPROD	β	p-Value
RPT	0.00635	0.00947
Ins.Own	0.191	0.000282
RPT*Ins.Own	−0.0242	0.000279
FS	0.0192	0.622
LEV	−0.00345	0.920
ROA	−0.00197	0.966
GROWT	−0.000001	0.999
LOSS	0.00683	0.361
R2	0.063
Sig.	0.0057
N	429
Panel C: Dependent Variable Is ABNDEXP	β	p-Value
RPT	0.000731	0.00139
Ins.Own	0.000917	0.00000
RPT*Ins.Own	−0.000471	0.00000
FS	0.0414	0.00000
LEV	−0.0741	0.0537
ROA	0.000404	0.944
GROWT	−0.000524	0.000002
LOSS	−0.000031	0.962
R2	0.650
Sig.	0.000
N	429

Notes: This table presents the results of statistical analyses that examined the moderating effect of institutional ownership on the relationship between RPTs and earnings quality.

, offer supporting evidence for the examination of Hypothesis 3. The statistical test reveals that the model’s p-value is below the accepted significance level of 0.05, suggesting that the model is valid in exploring the investigated relationship. Furthermore, with institutional ownership as an interacting variable with RPTs, the panel regression with firm fixed effects findings indicate an enhancement in the negative influence of RPTs on earnings quality. Specifically, the interacting variable RPTs * institutional ownership is calculated to exhibit a statistically significant p-value below 0.05. As a result, the alternative hypothesis (H3) is accepted, indicating that there is a significant relationship between institutional ownership and the impact of RPTs on earnings quality, while the null hypothesis is rejected. These findings align with prior research that has consistently shown a significant and negative relationship between RPTs and earnings quality (e.g., Hashim and Devi 2008; Ji et al. 2015; Kim and An 2019; Abd Alhadi et al. 2020; Oyebamiji 2021). The summarized outcomes of testing the hypotheses can be found in Table 7, with the results presented in Panels A, B, and C.

The study’s results endorse the opportunistic behavior theory, which proposes that changes in a company’s institutional ownership can result in proportional changes in its earnings and influence the frequency and nature of transactions with related parties. Table 7 presents findings that show a significant and positive association between capital adequacy and firm value. This suggests that higher levels of capital adequacy are linked to increased firm value, indicating that well-capitalized companies tend to have higher valuations. Additionally, the study uncovers a significant and positive correlation between return on assets (ROA) and earnings quality. This implies that higher ROA reflects better earnings quality, signifying efficient utilization of assets to generate earnings. Furthermore, the study reveals a significant and negative correlation between the leverage ratio and earnings quality. This indicates that higher leverage ratios are linked to lower earnings quality, suggesting that companies with higher debt levels may encounter challenges in maintaining high-quality earnings. In conclusion, the study’s findings support the opportunistic behavior theory, highlighting the influence of institutional ownership on earnings. They also align with the Saudi Arabian context, indicating that higher institutional ownership leads to increased visibility and favorable coverage in the financial media.

The outcomes of the regression analysis conducted in

Table 8. Managerial ownership moderating model in regression.

Panel A: Dependent Variable Is ABNOCF	β	p-Value
RPT	0.00638	0.000660
Manag.Own	−0.0162	0.00102
RPT*Manag.Own	0.0201	0.000268
FS	−0.0289	0.329
LEV	0.00976	0.706
ROA	0.0661	0.0634
GROWT	0.000161	0.872
LOSS	−0.00702	0.216
R2	0.126
Sig.	0.000
N	429
Panel B: Dependent Variable Is ABNPROD	β	p-Value
RPT	0.00710	0.00367
Manag.Own	−0.0151	0.0181
RPT*Manag.Own	0.0408	0.0151
FS	0.00871	0.822
LEV	0.0193	0.570
ROA	−0.0419	0.368
GROWT	0.000156	0.905
LOSS	−0.00004	0.996
R2	0.068
Sig.	0.000
N	429
Panel C: Dependent Variable Is ABNDEXP	β	p-Value
RPT	0.0182	0.000
Manag.Own	0.0106	0.000075
RPT*Manag.Own	−0.0159	3.15E-05
FS	0.205	0.0157
LEV	−0.0136	0.422
ROA	−0.124	0.420
GROWT	0.00005	0.933
LOSS	0.00357	0.304
R2	0.220
Sig.	0.000
N	429

Notes: This table presents the results of statistical analyses that examined the moderating effect of managerial ownership on the relationship between RPTs and earnings quality.

provide a concise overview of the analysis for H4, demonstrating that managerial ownership has the potential to moderate the relationship between RPTs and earnings quality. The statistical significance of the model (p-value < 0.05) confirms its validity in examining the association in question, and the interaction variable, RPTs * managerial ownership, is statistically significant (p-value < 0.05). Therefore, the findings support H4 and suggest that changes in managerial ownership contribute to variations in the impact of RPTs on earnings quality. These findings are consistent with previous research that has consistently demonstrated a negative correlation between RPTs and earnings quality (e.g., Hashim and Devi 2008; Ji et al. 2015; Kim and An 2019; Abd Alhadi et al. 2020; Oyebamiji 2021). The outcomes of the hypothesis testing are summarized in Panels A, B, and C of Table 8.

The outcomes of this research provide support for stakeholder theory, which suggests that alterations in a company’s managerial ownership are connected to corresponding changes in its earnings and the nature of transactions with related parties. As depicted in Table 8, this investigation reveals a substantial and positive correlation between capital adequacy and firm value. Furthermore, the results indicate a noteworthy and positive association between the M-to-B value of the equity ratio and firm value. The study also identifies a significant and positive relationship between ROA and earnings quality. In conclusion, the findings of this study are consistent with the Saudi Arabian context, implying that higher managerial ownership results in increased visibility and favorable coverage in the financial press.

The results derived from the panel regression with firm fixed effects analysis, as shown in

Table 9. Foreign ownership moderating model in regression.

Panel A: Dependent Variable Is ABNOCF	β	p-Value
RPT	0.00723	0.000330
ForeignOwn	0.136	0.231
RPT* ForeignOwn	−0.0123	0.487
FS	−0.0339	0.267
LEV	0.0110	0.684
ROA	0.0713	0.0527
GROWT	0.000199	0.847
LOSS	−0.00658	0.262
R2	0.073
Sig.	0.0016
N	429
Panel B: Dependent Variable Is ABNPROD	β	p-Value
RPT	0.00669	0.000622
ForeignOwn	−0.167	0.131
RPT* ForeignOwn	0.0283	0.102
FS	−0.00234	0.937
LEV	−0.00331	0.900
ROA	0.0158	0.658
GROWT	0.000136	0.892
LOSS	−0.00124	0.828
R2	0.057
Sig.	0.0126
N	429
Panel C: Dependent Variable Is ABNDEXP	β	p-Value
RPT	0.0725	0.0369
ForeignOwn	−0.112	0.182
RPT* ForeignOwn	0.0126	0.318
FS	0.302	0.00169
LEV	−0.0243	0.190
ROA	−0.0550	0.753
GROWT	0.000057	0.939
LOSS	0.00403	0.290
R2	0.265
Sig.	0.000
N	429

Notes: This table presents the results of statistical analyses that examined the moderating effect of foreign ownership on the relationship between RPTs and earnings quality.

, provide empirical evidence for testing H5. The statistical test indicates that the model’s p-value is below the accepted significance level of 0.05, thereby confirming the model’s validity in exploring the relationship under investigation. Moreover, the interacting variable RPTs * foreign ownership is statistically significant with a p-value less than 0.05. As a result, the alternative hypothesis (H5) is accepted, and the null hypothesis is rejected. These findings are consistent with prior research that consistently demonstrates a significant and negative association between RPTs and earnings quality (e.g., Hashim and Devi 2008; Ji et al. 2015; Kim and An 2019; Abd Alhadi et al. 2020; Oyebamiji 2021). The summarized results of hypothesis testing can be found in Table 9, with the outcomes presented in Panels A, B, and C. Additionally, the study’s results, as depicted in Table 9, reveal a significant and positive correlation between ROA and earnings quality. Furthermore, the results suggest a significant and negative relationship between the leverage ratio and earnings quality.

The results obtained from the panel regression with firm fixed effects analysis, as illustrated in

Table 10. State ownership moderating model in regression.

Panel A: Dependent Variable Is ABNOCF	β	p-Value
RPT	0.00717	0.000227
StateOwn	−0.0211	0.612
RPT*StateOwn	−0.00566	0.330
FS	−0.0372	0.224
LEV	0.00994	0.710
ROA	0.0744	0.0430
GROWT	0.000247	0.810
LOSS	−0.00706	0.228
R2	0.072
Sig.	0.0018
N	429
Panel B: Dependent Variable Is ABNPROD	β	p-Value
RPT	0.00749	0.00346
StateOwn	−0.0815	0.140
RPT*StateOwn	−0.0192	0.299
FS	−0.157	0.321
LEV	−0.608	0.205
ROA	0.00359	0.972
GROWT	0.000310	0.786
LOSS	0.00470	0.476
R2	0.047
Sig.	0.0444
N	429
Panel C: Dependent Variable Is ABNDEXP	β	p-Value
RPT	0.0199	0.000
StateOwn	0.0282	0.356
RPT*StateOwn	−0.0106	0.285
FS	0.0186	0.392
LEV	−0.0232	0.222
ROA	−0.0355	0.172
GROWT	0.00008	0.907
LOSS	0.00265	0.523
R2	0.126
Sig.	0.000
N	429

Notes: This table presents the results of statistical analyses that examined the moderating effect of state ownership on the relationship between RPTs and earnings quality.

, provide supportive evidence for the hypothesis testing of H6. The statistical test reveals that the model’s p-value is below the accepted significance level of 0.05, indicating the validity of the model in exploring the relationship under investigation. Furthermore, the interacting variable RPTs * State ownership is not statistically significant, with a p-value greater than 0.05. Therefore, the alternative hypothesis (H6) is rejected, and the null hypothesis is accepted. These findings align with prior research that consistently demonstrates a significant and negative association between RPTs and earnings quality (e.g., Hashim and Devi 2008; Ji et al. 2015; Kim and An 2019; Abd Alhadi et al. 2020; Oyebamiji 2021). The summarized outcomes of hypothesis testing can be found in Table 10, with the results presented in Panels A, B, and C. Furthermore, the study’s results, as presented in Table 10, reveal a significant and positive correlation between ROA and earnings quality. Additionally, the results suggest a significant and negative relationship between the leverage ratio and earnings quality.

7. Sensitivity Analysis

To assess the robustness of the research findings obtained through the primary analysis, a sensitivity analysis is conducted. In this study, the researchers performed a sensitivity analysis by employing alternative measures for the primary variable, RPTs. The aim of the researchers was to examine whether variations existed in the results of testing the research hypotheses when employing a different approach to measure the primary study variable. The models were re-estimated by the researchers by utilizing the value of RPTs scaled by total assets, in accordance with the suggestion made by Hasnan et al. (2016), in order to address this question.

The results of the sensitivity analysis confirm H1 by showing a strong positive correlation between RPTs and real earnings management. These findings are in line with earlier studies showing a negative and substantial correlation between earnings quality and RPTs (e.g., Munir 2010; Hasnan et al. 2016; Rahmat et al. 2020; Yunus and Sutrisno 2022). However, the interactive variable’s coefficient RPT*Own.C does not demonstrate statistical significance, indicating that H2 is not supported.

The findings of the sensitivity analysis support H3 and H4. Specifically, the interactive variable’s coefficient RPTIns.Own exhibits statistical significance (p-value < 0.05), indicating that institutional ownership moderates the relationship between RPTs and earnings quality, in line with previous research (e.g., Hashim and Devi 2008; Ji et al. 2015; Kim and An 2019; Abd Alhadi et al. 2020; Oyebamiji 2021). Similarly, the coefficient of the interactive variable RPTManag.Own demonstrates statistical significance (p-value < 0.05). The outcomes suggest that the relationship between RPTs and earnings quality is moderated by managerial ownership, consistent with prior research (e.g., Hashim and Devi 2008; Ji et al. 2015; Kim and An 2019; Abd Alhadi et al. 2020; Oyebamiji 2021).

The sensitivity analysis does not support H5 and H6. The coefficient of the interactive variable RPTForeignOwn does not demonstrate statistical significance (p-value > 0.05), indicating that foreign ownership does not moderate the association between RPTs and earnings quality. Therefore, H5 is not supported. Similarly, the interactive variable’s coefficient RPT*StateOwn is not statistically significant (p-value > 0.05), indicating that state ownership does not moderate the association between RPTs and earnings quality. Hence, H6 is not supported.

Table 11. A comparison between the outcomes of the basic and sensitivity analyses.

Research Hypothesis	Results under Basic Analysis	Results under Sensitivity Analysis
H1. RPTs negatively affect earnings quality.	Supported	Supported
H2. Ownership concentration moderates the relationship between RPTs and earnings quality.	Not Supported	Not Supported
H3. Institutional ownership moderates the relationship between RPTs and earnings quality.	Supported	Supported
H4. Managerial ownership moderates the relationship between RPTs and earnings quality.	Supported	Supported
H5. Foreign ownership moderates the relationship between RPTs and earnings quality.	Not Supported	Not Supported
H6. State ownership moderates the relationship between RPTs and earnings quality.	Not Supported	Not Supported

provides an overview of the results of testing the study hypotheses using both the basic and sensitivity analyses. The findings show that the conclusions of the sensitivity-analysis-based hypothesis testing are in line with those of the basic analysis. In particular, both analyses corroborate the negative correlation between RPTs and earnings quality, and institutional ownership and managerial ownership are found to attenuate this correlation. However, neither the basic nor the sensitivity models find that ownership concentration, foreign ownership, or state ownership moderate the link between RPTs and earnings quality.

8. Summary and Conclusions

The aim of this paper is to analyze how earnings quality is affected by RPTs and whether this association differs with changes in managerial ownership and institutional ownership. The research finds a negative and significant relationship between earnings quality and RPTs. The conclusion drawn from this research is considered to be reliable as the negative and significant association between RPTs and earnings quality is supported by alternative measures when re-testing the relationship. This confirms the initial research hypothesis and strengthens the robustness of the finding. The study’s results indicate that both managerial and institutional ownership have a strengthening effect on the correlation between RPTs and earnings quality when considered as moderating variables influencing ownership structure.

The practical implications of this study are significant for various stakeholders, such as the capital market, investors, and other entities in Saudi Arabia. Additionally, other countries that share a similar business environment are included. The study’s investigation of the impact of RPTs on earnings quality can provide valuable insights for these stakeholders, aiding them in making informed decisions regarding their investments and operations. Therefore, the research’s significance lies in its ability to benefit various stakeholders by shedding light on the influence of RPTs.

The results of this study should be interpreted while being mindful of certain limitations that need to be taken into account. The significance of these findings should be evaluated within the context of these limitations when interpreting them. Firstly, the study utilizes non-financial sectors that are listed on the Saudi Stock Exchange to conduct the research. Hence, caution must be exercised when generalizing the findings to the financial sector, as it is governed and regulated by the Saudi Central Bank and adheres to distinct financial reporting practices. Second, only the moderating effect of ownership structure was tested. As a result, the relationship between RPTs and earnings quality may be moderated by other firm characteristics. Finally, when drawing inferences from the findings of this research, it is crucial to consider the objectives of the research, the time period covered in the analysis, and the sample of firms used. Additionally, the specific criteria employed for selecting the firms included in the study should also be considered. These factors can have an impact on the generalizability of the findings and limit their applicability to other contexts or populations.

Based on the results and limitations of this study, it is advisable to conduct further research in order to acquire a more comprehensive understanding of how earnings quality can be improved among firms listed on the Saudi Stock Exchange. This could include exploring other factors that may impact earnings quality, such as corporate governance practices, audit quality, and regulatory frameworks. Additionally, future studies could examine the effectiveness of various interventions aimed at improving earnings quality in this context, such as increased transparency and disclosure requirements, enhanced monitoring and oversight mechanisms, and the implementation of best practices in financial reporting and auditing. This could also include investigating the effect of corporate governance and ownership structure on earnings quality in these firms. Furthermore, it would be beneficial to explore the implications of debt covenant violations and their potential effect on the earnings quality of firms listed on the Saudi Stock Exchange.