Related Party Transaction and Income Smoothing in Nigerian Listed Commercial Banks: The Moderating Effect of Capital Adequacy

Abstract

There has been increasing concern over the effect of related party transactions on the credibility of reported earnings. This is moreso in sectors that are associated with opaque practices such as the banking industry where insider loans sometimes degrade the quality of loan assets. This study investigated the association between related party transaction (measured by deposits from related parties) and income smoothing, and evaluated the moderating influence of capital adequacy on the relationship. The study was premised on signalling theory and institutional theory, and data from eleven listed commercial banks in Nigeria for nine years were analysed using Pearson correlation and multivariate regression model. Results showed that deposits from related party were positively and significantly associated with income smoothing, suggesting that as deposits from related party increase, the level of income smoothing also increases. Further results showed that capital adequacy significantly moderated this relationship by changing the direction of the relationship from positive to negative. The findings of this study add to the scanty literature on related party transactions (RPT) and income smoothing in Nigeria, and provide first-time evidence on the effect of regulatory capital on the relationship between related party transaction and income smoothing. The results also have implication for regulators, especially those in search of solutions to the problem of poor quality earnings.