National governance, corporate governance and firm performance : empirical evidence from two MENA countries, Jordan and UAE

Experts’ analysis of the report conducted by The Financial Crisis Inquiry Commission (FCIC) in 2011 shows that weak governance practices have been among the key causes, or at least exacerbate, the recent financial crisis and the severe corporate failures in the US market and elsewhere around the world. Therefore, governments and other regulatory bodies have been convinced to impose strict regulatory requirements and implement effective plans to ensure sound corporate governance practices. By reviewing extant literature, I find a clear gap in studying the effect of governance variables on firm performance in emerging markets in general and in the Middle East & North Africa (MENA) capital markets in particular, where the existence of majority (controlling) shareholders is predominant, and institutional framework is less developed. This research aims to examine the effect of country- and firm-level corporate governance mechanisms on the performance of non-financial firms listed in Jordan and in the United Arab Emirates (UAE). This study uses the Two-Step Dynamic System Generalised Method of Moments (GMM) estimator to examine this relationship over a seven-year period from 2008 to 2014. The empirical analyses include three studies. The first study examines the effect of firm-level corporate governance variables (e.g., ownership and board of director’s structures) on firm performance using the panel dataset of 113 nonfinancial listed firms on the Amman Stock Exchange (ASE) in Jordan. The second study examines the impact of the selected firm-level governance variables on firm performance using a panel dataset of 40 non-financial listed firms on the Emirates Securities Market (ESM) in the United Arab Emirates (UAE). Finally, I use the combined panel dataset of the nonfinancial firms (153) listed in both markets to examine the impact of a series of country- and firm-level governance variables on firm performance. This study provides evidence that governance of listed firms in Jordan and in the UAE, is characterised by the presence of strong blockholders (including; institutional and family investors). Importantly, in line with recent advances in corporate governance research (i.e., Wintoki et al., 2012; Nguyen et al., 2014, 2015), this research provides evidence that the one-year lagged firm performance is significantly positively correlated with current firm performance and governance practices. This support the notion presented by recent advances in corporate governance research that dynamic framework should be applied when examining the relationship between governance and performance. Moreover, the results in general suggest that the effect of ownership structure on firm performance persists in both markets. For the Jordanian market, the results indicate that the three ownership structure variables (family ownership, institutional ownership, and ownership concentration) appear to have statistically positive significant effects on firm performance. On the other hand, board of directors’ variables ‒board size, duality and independence‒ seem to have no significant implications on firm performance using Jordanian dataset. This may imply that strong presence of controlling shareholders may substitute the implications of board of directors’ variables. For the UAE’s market, the results show that only ownership concentration has a positive effect on firm performance. The type of the dominant shareholder has no implications in this context. Furthermore, similar to the Jordanian case, board of director variables ‒board size and independence‒ have no implications on firm performance in this country. These results remain robust even after using alternative firm performance indicators i.e., ROA and ROE. The results of the third study, using the combined sample of 153 nonfinancial listed firms in Jordan and UAE, indicate that only ownership structure variables ‒family ownership, institutional ownership and ownership concentration‒ are significantly positively related to firm performance. Board of directors’ variables ‒size, duality and independence‒ still showing no important implications on firm performance. These results highlighting the importance of ownership structure (concentration) as the most important at firm-level governance mechanisms in such small emerging markets. The main findings remain robust even after using alternative governance and performance metrics. These results are in line with the efficient monitoring hypothesis of blockholders as suggested by agency theory. At the country-level governance, the empirical analyses executed in the third study show that higher national governance quality levels –such as legal protection of shareholders, the rule of law, government effectiveness and regulatory quality– are associated with higher firm performance. These results are in line with the institutional theory predictions about the ability of external (country-level) governance instruments in improving firm performance and reducing its variability by encouraging low-risky investments. This study is one of the first studies to examine the relationships between a suite of country- and firm-level corporate governance mechanisms and firm performance using a dynamic modelling approach for the Jordanian and the UAE’s capital markets. The findings of this thesis significantly contribute toward a better understanding of how the country-level governance and firm-level governance influence operational and market performance of the firms operating in the emerging markets of the MENA region ‒ a context has been ignored in the prior governance literature. The practical potential of this research in terms of policy is to inform decisions relating to institutional infrastructure and functions as well as pointing to possible effects of financing consequences as well as corporate control, ownership and governance decisions connected shaping a firm’s market and operational outcomes.