The Impact of Corporate Governance Mechanisms on the
Performance of UAE Firms: An Empirical Analysis
Khaled Aljifri, PhD Mohamed Moustafa, PhD
College of Business and Economics
The main aim of this study is to investigate empirically the effect of some internal and external corporate governance mechanisms on the UAE firm performance (i.e., Tobin's q). Like many of the developing countries all over the world, the UAE has recently initiated the application of the international standards of corporate governance as a part of its merge with the global economy. This study utilizes a sample of 51 firms using the accounting and market data available for 2004. The sample firms are all listed in either the Dubai Financial Market or the Abu Dubai Securities Market. The cross-sectional regression analysis is employed to test the hypotheses of the study. The results of this study show that the governmental ownership, the debt ratio (total debt/total assets), and the payout dividends ratio have a significant impact on the firm performance; whereas the institutional investors, the board size, the firm size (sales), and the audit type show a non-significant impact. This study concludes that three of the corporate governance mechanisms in the UAE used in this study appear to be strong enough to affect the firm performance. However, the other four mechanisms are found to have a weak effect on the firm performance which could be a result of the significant absence of some aspects of corporate governance practices and lack of enforcement of rules.
The last decade has witnessed a marked increased in multi-disciplinary empirical research investigations on the effect of alternative corporate governance mechanisms on firm performance. In accounting and finance literature, studies of corporate governance issues have received great attention and have been used as indicators for firms' successes or failures. These studies reveal that firms with robust corporate governance mechanisms seem to be more successful compared with those companies having weak corporate mechanisms.
A number of studies have proposed that firms should operate in the interests of shareholders when markets are perfect. However, in emerging Khaled Aljifri, Mohamed Mousafa December 2007
markets, which are imperfect and incomplete, this is not the case. Corporate governance systems may provide an appropriate starting point for the development of any policies aimed at building an efficient market. The UAE, like many other developing countries all over the world attempting to merge with the global economy, has recently initiated the application of international standards of corporate governance. The major aim of this paper is to investigate the effect of selected internal and external corporate governance mechanisms on the UAE firm performance. Through a careful analysis of existing research, it is our belief that no study has yet examined empirically the effect of the corporate governance mechanisms on the UAE firms. This study has specific relevance to the need of the UAE business environment. Nonetheless, it is believed that many other developing countries, especially Middle Eastern countries, have similar problems and needs. Consequently, results of this study may prove beneficial and applicable to these countries as well.
The remainder of this paper is organized as follows: Section 2 discusses the corporate governance systems and mechanisms. The status of corporate governance in the UAE is described briefly in section 3. Section 4 presents the data, hypotheses, and methodology. A full discussion of the empirical results is presented in section 5, with conclusions, recommendations, and future extensions provided in section 6.
2. Corporate Governance Systems and Mechanisms
Corporate governance, when viewed from the perspective of the...