The characteristics of board of directors and related party transactions

Recently, accounting scandals have raised considerable concern among regulators, and accounting professionals about related party transaction in Korea. According to prior research, related party transactions could be used as a source of earning management. This study examines whether there is an association between related party transaction that allegedly are used to manipulate earnings and corporate governance, particularly focusing on the characteristics of board of directors. The purpose of this paper is also to investigate whether good governance structures (characteristics of board of directors) help constrain management opportunistic behavior in Korean listed firms. The characteristics of board of directors are measured by size, independence, expertise and activity. This paper provides evidence that independence and expertise of the board of directors are associated with lower related party transactions. These results suggest that board of directors play a significant role in monitoring transactions between related parties, in turn, reducing effectively these dealings.