RELATED PARTY TRANSACTIONS: EVIDENCE OF INCOME SMOOTHING IN THE BRAZILIAN CAPITAL MARKET

Abstract

Related party transactions (TPRs) are viewed from two perspectives. The first is that such transactions reduce transaction costs, increasing the company's performance. The second, that the proximity between the parties, added to the conflicts of interest, make the TPRs a tool for manipulating the results and expropriating the minority shareholder. While TPRs can be used to distort the company's results, consequently the quality of this company's profit decreases, as these results are no longer a relevant and reliable information base. For this reason, this article aimed to investigate the influence of TPRs on the smoothing of results, assuming the hypothesis that these transactions are used to intentionally smooth profits. The Lang et al (2012) model was used for intentional smoothing, a model by Jian and Wong (2010) and Al-Dhamari (2018) to measure inappropriate TPRs and quantile regressions to analyze the behavior of the abnormal TPRs in each smoothing quartile. As a result, it was obtained that abnormal sales and purchase TPRs, both individually and jointly, are used with the purpose of intentionally smoothing profits. The study contributes to the profit quality literature by providing new evidence that TPRs are related to the intentional smoothing of results; it also has useful implications for investors and analysts in assessing the value of the company, given the existence / volume of TPRs it owns, and contributes to regulatory agencies in improving the standards related to TPRs and the protection of minority shareholders.