Board structure and firm financial performance in the context of the emerging Saudi market
Creators: name: Almadi, Madi
Publisher: name: RMIT University
Year: 2024
Subjects: classificationCode: 350701
subject: Corporate governance
classificationCode: 350706
subject: International business
classificationCode: 380202
subject: Econometric and statistical methods

description: Earlier corporate governance studies have demonstrated the influence of dimensions of board structure on firm financial performance. However, the overwhelming majority of that research has been conducted within the context of advanced markets; little research relates to emerging markets, and particularly the Saudi Arabian market.<br><br>This research extends the literature on corporate governance by conducting the first empirical investigation of the relationship between board structure and firm financial performance through bundling theory with contextual considerations for the emerging Saudi Arabian market. In fact, certain political, social, and administrative elements have significant influence in the Saudi market, where members of the ruling royal family, individuals from a privileged regional background, and government bureaucrats are the leading forces. In addition, the Saudi Arabian corporate governance environment is less developed – both in terms of regulation and enforcement of law – than in the countries in which most corporate governance studies have been undertaken.<br><br>This research adopted a comprehensive theoretical approach provided by agency theory, resource dependence theory, hegemony theory, stewardship theory, and supplemented by other theoretical considerations related to an emerging markets context, to explain the effect of board structure on firm financial performance in the Saudi context. Since theoretical frameworks that examine this relationship in this context are absent, the research developed eight hypotheses to address this void. These hypotheses were that outside directors with royal status, outside directors originating from the region of Najd, inside directors with large equity ownership, <br><br>inside non-Saudi directors, and Saudi Government Representative Directors (SGRDs) have a positive impact on the dependent variable of firm financial performance. Further, two moderation terms were introduced to reflect positive effects of SGRDs with outside directors with royal status, and SGRDs with inside non-Saudi directors, on the dependent variable. Outside directors with large equity ownership were posited to have a negative impact on firm financial performance.<br><br>To test the proposed hypotheses, this research used a cross-sectional sample of all 131 publicly listed companies on the Saudi Stock Exchange for the years 2009 to 2013, making the total sample size 655 companies. The data was collected from secondary sources and publicly available firm annual reports over 2014–2015. Quantitative analysis included descriptive statistics, bivariate correlations, hierarchical multiple and moderated ordinary least squares (OLS) regression analysis. Several steps were taken to validate compliance with the OLS assumptions of multicollinearity, normality, autocorrelation, and heteroskedasticity, as well to assess the risk of endogeneity bias. <br><br>The findings of this research indicate that directors connected to influential political, social, and administrative institutions – namely royals, individuals from the region of Najd, and government officials – enhance the financial performance of the listed companies in Saudi Arabia. In the absence of such directors, Saudi firms can witness economic and communication conflicts, particularly if directors with large equity ownership dominate the board. However, the alignment of large equity ownership and executive management would overcome these conflicts.<br><br>The findings imply that integration of theory and context provides a more accurate assessment of board phenomena in Saudi Arabia than in previous research. Optimising the recognition of board members by utilising powerful informal institutions identify the key players in the boardrooms who influence corporate financial performance. A contextually embedded configuration of board members in the emerging Saudi market yields better financial outcomes for firms and investors. Such an approach has significant implications for corporate governance theories and practices. Indeed, adoption of the effective Saudi Arabian board structures identified in this thesis could help resolve the problems of poorly developed corporate governance environments in other emerging markets. To enhance the generalisability of the findings of this thesis to other contexts, future comparative studies with robust analysis could be of a great significance and may lead to the establishment of a new vein of research.