Corporate governance, voluntary disclosure and financial performance: ban empirical analysis of Saudi listed firms using a mixed-methods research design

Abstract

This thesis empirically analyses corporate governance reforms in Saudi Arabia using a mixed-methods research design. Saudi Arabia has recently pursued corporate governance reforms; the establishment of the Capital Market Authority (CMA) in 2003 and the publication of the Saudi Corporate Governance Code (SCGC) in 2006 constitute a central part of these reforms. This study attempts to provide new insights by exploring the corporate governance reforms pursued. In particular, by using an integrated research design framework, the study seeks to: (i) examine the level of compliance with, and disclosure of, the governance provisions contained in the SCGC by Saudi listed firms; (ii) ascertain whether the introduction of the SCGC has helped improve corporate governance standards in the Saudi corporate context; (iii) investigate the factors affecting voluntary corporate governance disclosure among Saudi listed firms; (iv) examine the association between a number of individual corporate governance mechanisms (i.e., equilibrium-variable model) and financial performance in Saudi listed firms; (v) analyse the relationship between voluntary compliance with the SCGC and firm financial performance by employing a broad composite corporate governance index (i.e., compliance-index model); and (vi) explore the level of awareness and appreciation of good corporate governance practices among key internal and external stakeholders in Saudi Arabia. The first five objectives outlined above are examined using a quantitative methodology, whereas the sixth objective is investigated by employing a qualitative research design. Efforts have been made to achieve integration between the two different research designs by applying the Explanatory Sequential Design (two sequential stages) proposed by Creswell and Clark (2011) within a multi-theoretical framework that incorporates insights from agency, managerial signalling, stakeholder, stewardship and resource dependence theories. The decision to employ a mixed-methods research design is motivated by the relative lack of, and recent calls for, mixed-methods approaches in corporate governance research. The mixed-methods approach seeks to provide a more complete understanding of the effects of corporate governance reforms on corporate disclosure and performance. In addition to the quantitative analysis, semi-structured interviews were conducted with five different groups of key stakeholders. The interview data offers further scope to: (ii) explore the corporate governance reforms; (ii) examine the impact of such reforms on actual governance practices; and (iii) provide a unique opportunity to further understand and explain the quantitative findings. Through the quantitative approach, the study examined balanced panel data of 80 Saudi listed firms from 2004 to 2010. This generated a total of 560 firm-year observations that were collected manually from the sampled firms’ annual reports. First, the constructed Saudi Corporate Governance Index (SCGI) showed that the introduction of the SCGC has helped improve voluntary corporate governance disclosure among Saudi listed firms. Second, this study found that board size, audit firm size, the presence of a corporate governance committee, government ownership, institutional ownership and director ownership have a positive influence on the level of compliance with the SCGC. In contrast, the analysis showed that the proportion of independent directors and block ownership are negatively correlated with the level of voluntary corporate governance disclosure. Third, the findings obtained from the compliance-index model suggest that good corporate governance practices, proxied by the SCGI, are positively related to return on assets (ROA), but have no significant relationship with firm value, as measured by Tobin’s Q (Q-ratio). Similarly, the results from the equilibrium-variable model are by and large mixed. Whereas CEO duality, proportion of independent directors, board sub-committees and director ownership are positively related to ROA, board size is negatively associated with ROA. On the other hand, the proportion of independent directors, board size, frequency of board meetings and director ownership are positively related to firm value, while CEO duality and the presence of board sub-committees have no significant relationship with firm value. The results from the quantitative analysis are robust to controlling for a number of potential endogeneity problems. Finally, the findings obtained from the interview data generally suggest that the regulatory authorities and the CMA in particular need to further strengthen efforts to enhance the level of awareness and appreciation of good corporate governance practices among key internal and external stakeholders of corporate governance in Saudi Arabia.

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