Empirical essays on corporate governance and corporate outcomes in MENA countries

The current thesis consists of three essays analysing recent corporate governance (CG) reforms in Middle Eastern and North African (MENA) countries. The three essays place emphasis on three closely related CG topics that quantitatively seek to investigate the extent to which MENA CG reforms have been effective in enhancing three main sets of corporate outcomes.

The first essay investigates the level and determinants of voluntary CG compliance and disclosure in MENA countries during the period from 2009 to 2014. Specifically, this essay aims to empirically examine two main research questions: first, what is the level of voluntary compliance with, and disclosure of, CG provisions among listed firms in MENA countries?; and second, what factors can explain the variance in the level of voluntary compliance with, and disclosure of, CG provisions among listed firms in MENA countries? Relying on insights from neo-institutional theory, the findings of this study reveal that in general MENA listed firms have a relatively lower level of voluntary compliance with, and disclosure of, CG practices compared to developed countries. However, the level of CG disclosure improved over period 2009 to 2014, indicating that MENA countries have responded positively to their CG codes of best practice and recommendations. The findings also suggest that firm-level factors (i.e., Islamic values, board characteristics and ownership structure mechanisms) and country-level factors (i.e., religion and the quality of national governance) have a significant impact on firm-level voluntary CG compliance and disclosure. Specifically, the findings suggest that Islamic values disclosure, board diversity on the basis of gender and ethnicity, board independence and separation of the Chief Executive Officer (CEO)/chairperson roles have a positive association with the level of CG compliance and disclosure, while board size and director ownership impact negatively on the level of CG compliance and disclosure. The findings also suggest insignificant relationship between government ownership and block ownership with the level of CG compliance and disclosure. With regard to country-level factors, the results indicate that corporations listed in countries complying with Islamic economic principles and having high-quality national governance are more likely to voluntarily comply and disclose more CG practices than those that do not.

The second essay investigates the influence of board diversity (based on gender, ethnic minorities and nationality) on corporate outcomes. Thus, this essay seeks to empirically examine the extent to which board diversity influences firm market value, accounting returns, executives pay (EP) and the pay-for-performance sensitivity (PPS). The findings attempt to
expand current understanding of the role that board diversity can play in enhancing market value, accounting returns, EP and the PPS among MENA countries’ listed firms. Specifically, the MENA region has distinctive social norms, legal framework and structure of the economy, which suggest that the effect of board diversity on corporate outcomes may be different from those observed in developed countries. Informed by critical insights from agency, resource dependence, cognitive development, social identity and stakeholder theories, the empirical evidence reveals that boards of directors of MENA listed firms are dominated by national Arab male directors. The empirical evidence also shows that board diversity is a significant determinant of corporate outcomes in MENA listed firms. Specifically, firms with boards more diversified by gender, ethnic minorities and nationality are more likely to have higher accounting returns and market value. Additionally, a high percentage of female directors on the board improves firm market value and accounting returns, while foreign directors significantly and positively influence accounting returns. Further, the empirical results show that a firm’s CG quality has no moderating effect on the relationship between board diversity and firm market value. However, a high percentage of ethnic and foreign directors positively and significantly impacts the accounting returns in firms with weak CG. With regard to the impact of board diversity on EP, the findings reveal that different measures of board diversity have no significant impact on EP, whereas the inclusion of female and minority ethnic directors on corporate boards appears to enhance the PPS.

The third and final essay examines the extent to which CG practices can explain auditor choice and observable changes in audit fees among listed firms in MENA countries. The key objective of this essay is to investigate how effective the CG practices, including CG Index, board characteristics and ownership structure mechanisms, are in influencing the auditor choice and fees. The results of this study have the potential to deepen current understanding of the ability of different CG practices to impact auditor choice and fees among firms listed in MENA countries. Specifically, the audit profession and its quality in the MENA region are relatively poorly established compared to developed countries. This suggests that the impact of CG measures on auditor choice and fees decisions may be different from that observed in developed countries. Employing insights from agency theory, the study finds that CG Index, board diversity based on gender and ethnicity, board independence, separation of the CEO/chairperson roles and concentrated ownership impact significantly and positively on firm choice of Big 4 auditors. Board size impacts positively, but insignificantly, on Big 4 auditor choice decision, whereas government ownership and director ownership are insignificant and negatively related to Big 4 auditor choice decision. The third essay also shows that CG Index, board diversity based on gender and ethnicity and government ownership are significantly and negatively related to audit fees, whereas board size, board independence and director ownership have a significant, but positive effect on audit fees. Non-dual board leadership structure, and concentrated ownership have no significant impact on audit fees.

The documented empirical results of the three essays are fairly robust across a raft of econometric models and estimations that take into account potential endogeneity problems and alternative variables.

To summarise, empirical evidence for the extent of CG practices’ influence on these three sets of corporate outcomes among MENA countries’ listed firms is relatively rare. Accordingly, this study aims to contribute to the literature by providing new insights with specific focus on recent CG reforms that have been pursued in MENA countries. Particularly, this thesis contributes to the limited, but steadily growing body of literature on the effectiveness of CG mechanisms in influencing a number of crucial firm outcome, including voluntary CG compliance and disclosure, firm performance, EP, the PPS, and auditor choice and fees, among listed firms in MENA countries.