The moderation role of board independence change in the relationship between board characteristics, related party transactions, and financial performance

Abstract

The present study examines the moderation effect of board independence change on the relationship between board characteristics, related party transactions and financial performance of Indian listed banks over 10 years from 2010 to 2019. While board size, independence, diligence, and remuneration were taken to represent board characteristics, all key personnel and subsidiaries’ transactions were considered measures for related party transactions. On the other hand, the financial performance of banks was measured by two accounting-based measures (return on assets and profit after tax) and two market-based measures (earning per share and Tobin Q). The results revealed that board independence change has a significant negative effect on financial performance. Further, the results indicated that board independence change moderates positively and significantly the relationship between related party transactions and financial performance. The findings also showed that board independence change had a moderating effect that significantly and negatively weakens board size and effectiveness, negatively influencing banks’ profitability. Unlike other studies, this study uniquely uses board independence change as a moderator between board characteristics, related party transactions, and several measures of banks’ financial performance. The limited research highlighting this issue, where Indian banks have encountered several challenges in the last few years, has motivated the present study to bridge the existing gaps in the strand literature. Therefore, this research opens useful insights and has beneficial implications for policymakers, bankers, financial analysts, and academicians.