Market risk disclosures, corporate governance structure and political connections: evidence from GCC firms

ABSTRACT

This paper investigates the joint effect of political connections, in the form of the royal family member on board, and corporate governance on the market risk disclosures of the Gulf Cooperation Council (GCC) financial firms from 2007 to 2011. Previous research suggest that politically connected firms reduce the level of transparency in the GCC. However, we find that better corporate governance improves transparency and can be used as an effective tool in curbing the potentially adverse impact of politically connected board members on firms’ transparency. Our results have important implications for policy makers and can be generalized to other emerging markets.

KEYWORDS:

• Market risk disclosures
• corporate governance
• political connections
• GCC

JEL CLASSIFICATION:

• M40
• M41
• M48
• J16
• D72

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Such as preventing competitors from entering a market (Bunkanwanicha and Wiwattanakantang 2009), lowering corporate tax rates (Faccio 2006), assisting with survival during periods of financial distress (Faccio, Masulis, and McConnell 2006), providing favourable lending terms from creditors (Claessens, Feijen, and Laeven 2008), enhancing financial performance (Boubakri, Cosset, and Saffar 2012) and lowering the cost of capital (Boubakri et al. 2012; Al-Hadi, Taylor, and Hossain 2015).

² The Gulf Cooperation Council (GCC) includes Oman, United Arab Emirates (UAE), the Kingdom of Saudi Arabia (KSA), Kuwait, Qatar, and Bahrain.

³ See Shehata (2015) for an overview of development of corporate governance codes in the GCC.

⁴ See Al-Hadi, Taylor, and Hossain (2015) for further details on the construction of Corporate Governance index.

⁵ This is important for two main reasons. First, as our data and sample period is same as Al-Hadi, Taylor, and Al-Yahyaee (2016) and Al-Hadi, Hasan, and Habib (2016), we can directly compare our results with them. Second, we calculate the marginal contribution of the interaction term in comparison with the results reported in model 1 and model 2 where we check the individual effect of royal family director and corporate governance on risk disclosures, respectively.

⁶ It is calculated as follows: First, we take the difference between the coefficient of the interaction term and royal family director [β₃ (0.1320) − β₁.0479) = 0.085] in model 3. Then we take the difference between 0.085 and 0.055 (the coefficient of ROYAL_DIR in model 1).