The role of corporate governance strength in crisis and non-crisis times

ABSTRACT

This study evaluates corporate governance practices of listed firms in the United Arab Emirates and investigates whether corporate governance mitigates/exacerbates the impact of leverage and risk on firm performance during crisis and non-crisis times. The study constructs a corporate governance index not only to examine the dispute of the role of corporate governance during the crisis but also its influence on other factors that fuelled the crisis. A firm-level panel data is used that spans the period 2008–2012 of all listed firms on Abu Dhabi Securities Exchange (ADX) and Dubai Financial Market (DFM). The study finds a positive influence of corporate governance strength on the accounting performance, but a negative influence on the firms’ economic performance. In normal times, corporate governance mitigates the negative influence of leverage and risk on the accounting and economic firm performance. However, this synergy effect varies across performance indicators during crisis.

KEYWORDS:

• Risk
• leverage
• corporate governance index
• firm performance
• the UAE

JEL CLASSIFICATION:

• G30
• G38
• G39
• G18
• D81

Acknowledgements

The authors wish to thank Professor Ronan Powell, Professor Sangeeta Khorana, Professor Konstantinos Konstantaras, Professor Badri Narayanan and Associate Professor Asghar Afshar Jahanshahi for their kind suggestions. The authors would like also to thank seminar participants at the first workshop of FTAs in Global Governance, Keele University, UK; International Conference on Financial and Actuarial Engineering, London, UK; and the seventh Symposium on Business Postgraduate Research, UUM, Malaysia, for helpful comments and discussions. In addition, this article was partly funded by Universiti Utara Malaysia.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ A black swan event is an event in human history that was unprecedented and unexpected at the point in time it occurred.

² To calculate EVA, the book value of assets will be multiplied by the WACC whereas REVA will use the market value.

³ We deduct the yearly tax from the operating profit to get NOPAT as the net is not available in DataStream.

⁴ Only the branches of foreign banks and oil and gas companies are taxed in the UAE. However, the tax rates are not equal in all emirates/industries. Therefore, the tax rates are calculated as the tax amount divided by the pre-tax income.

⁵ The crisis as a stand-alone variable is included in the year dummies.

Additional information

Funding

This work was partly funded by the Universiti Utara Malaysia.