Corporate Governance and Financing Decisions by Saudi Companies

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  • Topic: Saudi Arabia, Economy of Saudi Arabia, Tadawul
  • Pages : 49 (7096 words )
  • Download(s) : 52
  • Published : November 4, 2012
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Corporate Governance and Financing Decisions by Saudi Companies

Ali Al-Nodel
College of Economy and Administration,
Qassim University,
P.O.Box 4667,
Burydah 51412 Al-Qassim,
Saudi Arabia.
Email: nodl@qu.edu.sa

Khaled Hussainey
Ain Shams University, Egypt
Accounting & Finance Division
Stirling Management School
Stirling University
Stirling FK9 4LA
United Kingdom
Email: Khaled.Hussainey@stir.ac.uk

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Abstract
Purpose: This paper aims to contribute to the corporate governance literature in emerging economies by examining the effect of some corporate governance mechanisms on financing decisions in Saudi Arabian listed companies. Methodology: A multiple regression model is used to examine the association between financing decisions and corporate governance mechanisms for a sample of 37 listed Saudi companies. In particular, we examine the effect of board size; ownership concentration and corporate governance reporting on the debt-to-equity ratio. Corporate governance reporting is measured by the content analysis approach. Findings: After controlling for companies’ profitability and their growth opportunities, we found that both board size and ownership concentration are positively associated with debt-to-equity ratio.

Research limitations: We limit our analysis to a small sample of firms that use the internet to communicate corporate governance information between October 2005 and January 2006.
Practical implications: The findings suggest that managers are likely to choose higher financial leverage when they have stronger corporate governance (large number of directors on the board and higher ownership concentration). However, we did not find any statistical association between corporate governance disclosure and debt-to-equity ratio. This suggests that firm’s asymmetric information is not an important driver of the financing decision of Saudi Arabian companies. This might be due to the nature of the Saudi business environment.

Originality: We strongly believe that this paper provides a novel contribution to the existing literature as we are the first to examine this issue in Saudi Arabia. Keywords: Corporate governance, financing decisions, emerging economies, Saudi Arabia.

Paper type: Research paper.

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1. Introduction
This paper aims to contribute to the corporate governance literature by examining the effect of corporate governance characteristics on financing decisions in Saudi Arabian listed companies. In particular, it examines the effect of board size; ownership concentration and corporate governance reporting on the debt-to-equity ratio. The investigation of these research issues in Saudi business environment could extend prior research and give different explanations to those carried out in more developed countries

Research related to determinant of corporate capital structure is a well established part of the accounting and finance research. Modigliani and Miller (1958) is the first to study this area of research. They also provided another study in the same area of research after modifying some assumptions such as relaxing the prefect market assumptions and considering corporate tax into their models (Miller and Modigliani, 1963). In their later study, they suggested that firm value will be enhanced if the level of debt increases because interest rate is a tax deductible and consequently companies would enjoy debt tax shield when funding their activities by long-term debt. Further accounting and finance research studies were more expressive. Those researches were concentrated on examining some determinants of corporate capital structure. For example, the association between board size and capital structure decisions have been suggested by a number of empirical studies (see for example Mehran 1992, Berger et al. 1997, Wiwattanakantang 1999, Wen et al. 2002, Du and Dia 2005, Abor and Biekpe 2005 and Al-Najjar and Hussainey 2010a and 2010b). Another determinant of capital structure...
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