Related‐Party Transactions, Firm Acquisitiveness and Tax Avoidance

ABSTRACT This paper investigates the association between related‐party transactions (RPTs) and tax avoidance and whether this relationship is stronger among acquisitive firms. We find that the existence of RPTs or acquisitive behaviour independently is negatively associated with tax avoidance but that acquisitive firms engaging in RPTs also exhibit higher levels of tax avoidance than those not engaging in RPTs. Further, we find the association between RPTs and tax avoidance in acquisitive firms is more significant for business RPTs even though such transactions are considered less opportunistic in nature than non‐business RPTs. Additional tests show that internal board monitoring, the reputation of external auditor and auditing standards related to RPTs can moderate the association between RPTs and tax avoidance among acquisitive firms. Our results illustrate a scenario where RPTs may lead to tax avoidance and highlight the role of corporate acquisitiveness in enabling such behaviour.