Corporate finance practices and corporate governance effect on firm performance and information leakage in Saudi Arabia

Hatrash, Hamad Omar (2018) Corporate finance practices and corporate governance effect on firm performance and information leakage in Saudi Arabia. Doctoral thesis (PhD), Manchester Metropolitan University.

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Abstract

The major aim of this thesis is to investigate corporate finance practices, as well as the effect of corporate governance mechanisms on firm performance and information leakage in Saudi Arabia. Saudi Arabia is a major state among developing and Middle Eastern countries, characterised by certain economic and financial differences in contrast with other advanced and developing countries. Little consensus exists with regard to the means through which firms should come to corporate financial decisions. Therefore, a scant number of studies have conducted comprehensive surveys into corporate finance practices, covering capital budgeting, cost of capital, capital structure and dividends. These studies have indicated that firm practices are not always in accordance with academic rules and theories. Regardless of such evidence, no research has been undertaken to explore the discrepancy between financial theories developed in western markets and the corporate financial practices of Saudi firms. Therefore, as far as I am aware, this thesis is the first study seeking to fill this literature gap, providing a contribution to the literature in the form of a comprehensive investigation of corporate finance decision making in Saudi Arabia. To execute this investigation, a draft survey was devised and distributed to the CFOs of all Saudi listed firms. Analysis of the responses indicated that popular techniques were IRR and NPV, for capital budgeting and earnings yield assessments of equity costs. The Zakat rate is the tax rate utilised by 94.2% of Saudi firms, with support present for the pecking-order theory and the trade-off theory. Furthermore, Saudi firms have a long-term target pay-out ratio, while strong support is indicated for the bird in hand theory and signalling mechanism. Moreover, one of the major issues relating to the Saudi market has been the emergence of insider trading and information leakage. Additionally, in 2006 the Saudi stock market crashed, producing a negative influence on investor confidence. Subsequently, Saudi Arabia’s Capital Market Authority (CMA) issued corporate governance regulations; in 2009, the CMA began enforcing these regulations on all Saudi listed firms, as a means of enhancing market transparency and credibility. Despite the significance of these regulations, no existing research has assessed the effect of these regulations on the information leakage phenomenon, or the impact of regulations on firm performance post-2009. Therefore, to the best of my knowledge, this is the first study investigating the effect of these governance mechanisms on information leakage, in addition to firm performance for the post-2009 period. To undertake this examination, information leakage was identified on the basis of cumulative abnormal returns (CARs), prior to quarterly and annual earnings announcements. Three models were utilised to calculate abnormal returns, namely the constant mean return model, market adjusted model and market model. Three measures were applied for firm performance: return on assets (ROA); return on equity (ROE), alongside Tobin’s Q. Additionally, for the regression analysis, the System Generalized Methods of Moments (GMM) was adopted as a control for autocorrelation, heteroscedasticity, heterogeneity and endogeneity. The findings indicated that significant information leakage and CARs was present prior to the official quarterly and annual earnings announcements. Besides, the information leakage level before quarterly earnings announcements for the period 2006-2008 were greater than for 2009-2014. Additionally, the results indicated the negative effect of ownership concentration, government ownership and board subcommittees’ presence on firm performance. Institutional ownership, director ownership, managerial ownership, board size and audit committee size were positively correlated to firm performance. Moreover, the results confirmed that ownership concentration, board size and frequency of board meetings have a positive influence effect on information leakage, whereas institutional ownership, director ownership, board subcommittees’ presence and audit committee size all have a negative impact on information leakage.