This paper examines economic consequences of a 2006 Securities and Exchange Commission regulation that mandated public firms to disclose their governance policies on related-party transactions (RPTs). Employing hand-collected RPT data for S&P 1500 firms, we find that the initiation of RPT governance disclosure significantly reduces the occurrence of RPTs, and that the reduction in RPTs is negatively associated with the implied cost of capital (ICC) and positively related to Tobin's Q. These effects are more pronounced for low-monitored firms and for firms with RPTs that are more likely to be opportunistic. We further find that firms with a formal written policy, a designated committee to review and approve RPTs, or more extensive disclosure on RPT governance benefit in terms of lower ICC.

In 2014, the PCAOB adopted a new auditing standard, AS 18 Related Parties, with the intention of enhancing auditors’ performance in auditing related-party transactions (RPTs). Using hand-collected data, we find significant reductions in both firms’ restatement risk and their engagement in RPTs following the AS 18 adoption. Such reductions are especially pronounced for smaller firms and firms having RPTs with principals, in which related persons in the counterparty of RPTs are the primary beneficiaries, such as CEOs, board chairs, or primary shareholders. We also find that smaller firms having RPTs with principals tend to pay higher audit fees post-AS 18. Our study responds to the PCAOB’s call to assess the economic consequences of AS 18. The findings suggest that AS 18 is associated with improved audit quality and reductions in auditees’ opportunistic RPT activities. Data Availability: Data are available from public sources as cited in the article and from the authors upon request.