The Budget Execution Quality of Related Party Transactions: Evidence from Hong Kong

Abstract

This paper proposes to use the related party transactions’ (RPT) budget completion ratio (BCR) as indicator of RPT’s execution quality. This paper studies BCR by defining budget ceiling through RPTs announcement and comparing the amount disclosed in annual report as budget execution result. Through statistical analysis of 285 RPT announcements, we classify RPT’s BCR into four benchmark grades. This paper sums up the BCR of RPT from the samples, and deduces moral obligation and moral judgement curve (OJ curve) in terms of BCR. OJ curve is the real dynamic equilibrium after the struggle agency problems. From our statistical results, we verified that Weitzman’s ratchet effect exists in the budget formulation of RPTs, and it is a solid proof of Weitzman’s ratchet effect applied to real business scenarios. The empirical results show ratchet effect exists in BCR of RPTs before and after the change from GEM board listing to main board listing in Hong Kong (Transfer). This paper also finds that it is significant to find the estimated actual amount in the coming year through the budget completion ratio (BCR) of RPT from last year. This paper is a pioneer to examine the execution quality of RPT by the means of (i) Weitzman’s Truth Inducing Model, (ii) BCR, and (iii) SGR as well as (iv) estimated actual amount.