The interplay of related party transactions, corporate social responsibility and financial distress: a difference-in-differences analysis of COVID-19 shocks

Purpose This study aims to examine the relationship among related party transactions (RPT), particularly sales, loans and payments, corporate social responsibility (CSR) and financial distress (FD). Further, the present study used board structure variables [proxied by board size and board independence (BI)] as a moderating factor in the relationship between RPTs and FD. Design/methodology/approach The present study used difference-in-difference (DiD), dynamic generalized method of moments and panel quantile regression to check the direct effect of RPT and CSR on FD, denoted by Z-score. In addition, the present study shows the moderating role of BS, i.e. board size (BS) and BI, on the relationship between RPT and FD. Findings The result of standard pooled OLS regression showed a significantly positive impact of CSR and related party payment (RPPAY) on FD, which helps in reducing financial distress (FD). Also, board independence (BI) is showing a significant positive impact on FD. The interaction effect of BS with related party loan (RPLO) is negative, with a Z score and the interaction effect of BI with RPLO is positive and significant. In addition, during COVID-19, highly stable firms exhibit greater resilience due to better liquidity, lower leverage and stronger profitability before the pandemic, enabling them to absorb shocks effectively. Originality/value To the best of the authors’ knowledge, the present study is the first to implement DiD to account for common trends over time, time-invariant differences and classify the firm into treatment and control groups based on their exposure to FD or pandemic-related shocks.