Corporate governance, investor protection, and firm performance in MENA countries

Abstract

The literature on development finance and corporate finance in emerging markets is, to date, primarily focused on the impact of country-level investor protection and differences in legal systems on firm value across countries. This paper extends the literature by investigating the relationship between firm-level governance and performance while controlling for country-level governance and other relevant variables within the context of the Middle East and North Africa (MENA) region. Evidence shows a strong and significant positive relationship between good corporate governance – such as higher investor protection and lower managerial entrenchment – and firm value. We also find that the positive effects of property rights on firm performance are more pronounced for firms with higher managerial entrenchment. In addition, the positive effects of property rights on firm performance are additionally more significant for firms with higher managerial entrenchment and higher cash holding. Finally, the positive effects of property rights on firm performance are additionally more significant for firms with higher managerial entrenchment and lower dividend payout.

Keywords:

• corporate governance
• firm performance
• the Middle East and North Africa region

Acknowledgements

The authors thank Dr Jeffrey Nugent and the participants of the session on Corporate Governance at the ERF 17th Annual Conference in Turkey. The authors would also like to thank the participants of the Economic Research Forum Conference for their insightful comments. This work has benefited from a financial grant from the Economic Research Forum. The contents and recommendations do not necessarily reflect the views of the Economic Research Forum. The usual caveats apply.

Notes

1. PricewaterhouseCoopers Global Best Practices Governance, Risk, and Compliance series.

2. PricewaterhouseCoopers Global Best Practices Governance, Risk, and Compliance series.

3. A Corporate Governance Survey of Listed Companies and Banks Across the Middle East and North Africa – 2008: http://www.ifc.org/ifcext/mena.nsf/AttachmentsByTitle/CG + Survey + of + Listed + Companies + and + Banks + across + MENA/$FILE/MENA + Corporate + Governance + Survey.pdf

4. Nassir Saidi, ‘Arab Spring,’ Market Reforms & Good Corporate Governance. Presentation at the P2C WBG Workshop, 20th June 2011.

5. The GCC countries are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates.

6. Using a list of 24 provisions included in the governance index followed by the Investor Responsibility Research Center (IRRC), the authors investigated the relative importance of these provisions and developed an entrenchment index based on six of the 24 provisions, namely: staggered boards, limits to shareholder bylaw amendments, poison pills, golden parachutes, and supermajority requirements for mergers and charter amendments.

7. In East Asian markets, the most important governance issue is that controlling shareholders may expropriate from minority shareholders instead of the separation of management from ownership control (Claessens, Djankov, & Lang, 2000). In the MENA regions, there are similar situations. For example, in Turkey, one shareholder controlled more than 50% of voting right in 45% of listed companies. In the majority of cases, the dominant shareholder was a holding company controlled by a family (Aytac & Sak, 2000). Families control 198 of the 257 listed companies. In the majority of cases, individual family members exercised control on cash flow rights through pyramids and cascading ownership structures (Yurtoglu, 2000). As a result, we focus on ownership in our paper. Because of data limitation, we do not focus on other aspects. We leave those aspects for future research.

8. Zattoni, Torben, and Vikas (2009) and Singh and Gaur (2009) find that there is a significant impact of business group affiliation on firm value.

9. We acknowledge that we cannot establish causality based on the current data. We leave this task to future research.

10. MENA Corporate Governance and the Arab Firestorm: http://www.hawkamah.org/files/ICGN_Yearbook_2011_Saidi%20article%20[76-79].pdf

11. McKinsey Quarterly, 12 September 2006.

12. Alex Todd, Corporate Governance Best Practices: One size does not fit all http://www.trustenablement.com/local/Corporate_Governance_Practices-One_size_does_not_fit_all.pdf.

13. Developing corporate governance codes of best practices – The International Bank for Reconstruction and Development. www.ifc.org/ifcext/cgf.nsf/AttachmentsByTitle/..read../Toolkit2-read.pdf