Open Journal of Accounting, 2014, 3, 28-37 Published Online January 2014 (http://www.scirp.org/journal/ojacct ) http://dx.doi.org/10.4236/ojacct.2014.31004 Related Party Transactions and Financial Performance: Is There a Correlation? Empirical Evidence from Italian Listed Companies Matteo Pozzoli 1 , Marco Venuti 2 1 Università degli Studi di Napoli “Parthenope”, Napoli, Italy 2 Università degli Studi di “Roma Tre”, Roma, Italy Email: matteo.pozzoli@uniparthenope.it , marco.venuti@uniroma3.it Received October 30, 2013; revised December 2, 2013; accepted December 10, 2013 Copyright © 2014 Matteo Pozzoli, Marco Venuti. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. In accordance of the Creative Commons Attribution License all Copyrights © 2014 are reserved for SCIRP and the owner of the intellectual property Matteo Pozzoli, Marco Venuti. All Copyright © 2014 are guarded by law and by SCIRP as a guardian. ABSTRACT Related party transactions (RPTs) can have a dual nature. On one hand, these transactions may be considered sound business exchanges, fulfilling the economic needs of the company. On the other hand, RPTs may be con- sidered a mechanism to exploit company resources as a consequence of existing conflicting interests. This study takes into account both aspects. Specifically, this paper investigates the relation between RPTs and companies’ financial performance, and thus verifies whether there is an association between these kinds of transactions and earnings management. This study examines the existence of this relation as regards the universe of Italian listed companies for the period of 2008-2011. According to the related data analysis, the research concludes that re- lated party transactions and companies’ financial performance results are not correlated and that there is no evidence of a cause-effect relation. Therefore, related party transactions do not appear—thanks also to the exis- tence of control mechanisms—a means used by Italian listed companies to realize earnings management, espe- cially earnings smoothing. KEYWORDS Related Party Transactions; Earnings Management; Accounting Standards; Corporate Governance 1. Introduction Related party transactions (RPTs) are defined as “a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged” (IAS 24). The definition of “related party” substantially includes controlling shareholders, directors and every other group which can exercise a degree of influence over the company (such as affiliates, joint ventures and close members of the related party’s family). A related party may enter into transactions with the related company using different economic terms compared to an independent party. In other words, a re- lated party may use these transactions to transfer re- sources in or out of the company thanks to its influence on the company’s decisions. RPTs can have a dual nature. On one hand, these transactions may be considered sound business ex- changes, fulfilling the economic needs of the company. They represent internal dealings able to reduce transac- tion costs and increase efficiency through the creation of an internal market within the corporate group [1-4]. The literature refers to this kind of RPT as “propping” or “ef- ficient transaction hypothesis”. On the other hand, RPTs may be considered a mechanism to exploit company re- sources as a consequence of existing conflictual interests. In particular, such a transaction may be carried out in the interest of insiders, i.e. directors and controlling share- holders, in order to expropriate wealth from outside in- vestors, i.e. non-controlling shareholders (NCSs) [1,3,5- 9]. According to this view, such transactions may imply the misuse of company’s resources (moral hazard) and the misrepresentation of private information (adverse OPEN ACCESS OJAcct