Sample Dissertation of Corporate Governance in Saudi Arabia

June 16, 2017


This dissertation chapter provides descriptive literature on corporate governance via examination of the effect the characteristics of corporate governance have on the financing decisions in the listed companies of Saudi Arabia.

It is necessary to state that the paper examines thoroughly the effect of ownership concentration, board size and corporate governance reporting on debt-to-equity ratio (DTE). The debt-to-equity ratio determines the availability of a listed company to borrow and is obtained by dividing the company’s accumulated debt with its available resources.


This chapter applies regression analysis in examining the manner in which the corporate governance variables affect Saudi Arabian listed companies as they use debt in financing their operations. In this chapter, the sample applied constitutes 37 companies that have been listed in the Stock Exchange of Saudi Arabia by January 2006.

The data contained in this chapter is primarily secondary and thus details on companies listed in the Saudi stock exchange are based on the paper published by Hussainey and Al-Nodel (2008). In this paper, the data collected constituted of listed companies in the Saudi Stock exchange for the period between 2005 and 2006 and thus this constitutes a total of 77 companies. Thus, this is quality data that assists in focusing on group of firms which do provide reports on corporate governance on their respective internet websites.

Controlling these companies’ growth opportunities and their profitability has enabled the research to conclude that the main variables of ownership concentration and the board size have a positive relationship with the DTE. This is a finding with suggestions that managers may opt for higher financial leverage if the corporate governance is strong enough (i.e. there is higher ownership concentration and a high number of directors in the board). It is however noted that empirical results in the relationships is somehow statistically insignificant in corporate governance reporting. This is a suggestion that the asymmetric information of the firms is not an important driver on Saudi Arabian companies financing decisions.

This may be attributed to the business environment in Saudi Arabia. A large sample was used so that it may represent the entire companies listed in Saudi stock exchange. The aim was to alleviate errors that may be in the conclusion.

Even if the larger sample cannot collectively represent the firms listed in the Saudi stock exchange, this is a bit better in giving the concluding statistics.


Capital structure decision is one of the excellently established chapters of finance and accounting research which is related to corporate capital structure determinants. Capital structure decision is not related to firm value. A firm’s value may be enhanced if the debt level increases. This may be shown by the fact that interest rate is tax deductible and companies do enjoy debt tax shield when they are funding their long-term debts (Miller and Modigliani 1963, P. 273).

Some researches have indicated that corporate governance variables interfere with the capital structure decisions. It is however noted that a limited number of studies have researched on capital structure determinants in developing countries and fewer of such studies may be discovered in Middle East.

This dissertation is motivated by the fact in 2006; Saudi Arabian Capital Markets Authority (SACMA) issued a guidance recommending that every listed company must disclose its corporate governance information for public scrutiny.

Literature review: Business environment of Saudi Arabia

There are many environmental factors affecting business in Saudi but due to the objective of this paper, the focus is on social, economic and political systems together with the Company Law of 1965 which regulates business practices in Saudi and corporate governance guidance issued in 2006 by SACMA.  Saudi Arabia is similar to most countries in Middle East and thus it is a country in the early stage of social, political and economic development. This is an attribute that makes the audit practice not only in Saudi but in the whole region to differ with that of developed countries.
Saudi Arabia’s political system is a monarchy that is headed by a king.

In this political system, three legislative bodies exist which have authority to approve and initiate policies, rules and regulations, the consultative council, various individual ministries and the council of ministers. Different groups in the political system exist and they have a major influence on new policies development and policy issues. Main groups consist of Islamic Scholars, businessmen, liberal elites, royal family, state officials, tribal leaders and academics. All these possess various powers and interests depending on the significance of the issue to its affairs and interests.

The Basic Law of Government that was introduced in 1992 is considered the constitution of the Kingdom of Saudi Arabia (KSA).

The legal system comes from the Islamic law since this is an Islamic country. There are also coded laws for certain fields of practice like labor, tax and commerce. This research has however found that Islamic law commonly prevails in legal disputes. This is a society that is highly influenced by Islamic values and Arabic heritage. All Saudis are Muslim. The Saudi society is characterized by the influence of personality and power of given individuals, privilege offered to personal relationships over other tasks, role of friend and family relationships over regulations and a very high level of secrecy (Al-Nodel 2004, P. 9).

This economy is oil-based with the government exercising strong controls on the country’s major economic activities. Of all the proven petroleum reserves in the world, Saudi Arabia has 25% and is thus ranked largest in petroleum exportation.

It thus has a leading role in OPEC. Production volumes and prices of oil in the globe influence the economy of Saudi Arabia. Oil was discovered in 1938 and since then, oil revenue bears the strongest contribution in Saudi economy.

For example, in the 90s, oil revenue accounted for almost 35% of the nominal GDP, 85% of receipts from exports and 75% of government revenue (Hussainey and Al-Nodel 2008, P. 43). (Refer to appendix 1 for Saudi Arabia’s expenditures, revenues, receipts and net surplus for three years; 2005, 2006 and 2007).

Most Saudi companies have been noticed to be dominated by family businesses, presence of a collection of controlled and foreign-owned companies which are mostly on joint venture agreements with local companies and also the deep involvement on the private sector from the government. According to Al-Nodel (2004, P. 16), around 1.14% of businesses dominated by families are from the joint-stock companies and this is even less than 40 per cent of capital for registered enterprises. Presence of controlled and foreign-owned companies in Saudi Arabia which are based on joint venture agreements with the local companies and government involvement in business represents a significant feature of the private wing.

Business practice is regulated via the 1965 Company Law. This is a law that sets conditions on establishment of businesses, description of legal frameworks for enterprises and it also requires publication of annual statements which must be audited by independent parties. The articles contained in the 1965 Common Law have conditions for certain business aspects like number of partners, accounts, minimum capital that must be maintained, registration requirements, number of directors, yearly audit of accounts and many others. The 1965 Common Law is believed to have emanated from the British Companies Act (1948). There are several similarities that exist between UK acts that were issued in years 1948, 1976 and 1967 and the Saudi Company Law of 1965.

Reporting requirements and legal frameworks for businesses act as the main features of the Saudi’s 1965 Company Law.

There is provision of several legal frameworks via which companies may be established like cooperative companies, Limited Liability Company, joint venture, general partnership and joint-stock companies. 1965 Company Law also states the requirements of reporting for businesses. It states that, for reporting to happen, there must be a report on an organization’s financial position and operation s, profit and loss account and a balance sheet every year.

Further, this law states that every limited liability company and corporation must provide annual financial statements which are audited by independent party who must have a license to practice this from the Ministry of Commerce and Industry (Hussainey and Al-Nodel 2009, P. 1).

Stock market in Saudi Arabia is in the process of development.

Royal Decree No.81230 was acquired in 1984 as the first attempt in regulation of the Saudi stock exchange. In this Royal Decree, Saudi Arabian Monetary Agency (SAMA) received actual control in the stock exchange via the country’s commercial banks. Significant change was seen in 2003 when Saudi Arabian Capital Market Authority (SACMA) was established and replaced SAMA in responsibility over the stocks exchange. This is one of the periods when there was tremendous change in the market value or the number of companies listed in the stock exchange. (Refer to appendix 2 for the stock market performance between 1996 and 2005)

The year 2006 saw the new body SACMA intensify efforts in provision of fairness in Saudi stock trading. One of the major efforts was issuing a draft of the corporate governance for companies listed in 2006. This draft consists of recommendations on the methods for the best practice in corporate governance which should be listed by the companies counsel. It covers five main principles provided by the Organization for Economic Co-operation and Development (OECD).

These principles include equitable shareholder treatment, shareholders rights, and stakeholders’ role in corporate governance, responsibility of board of directors and transparency and disclosure (Hussainey and Al-Nodel 2008, P. 46).

Recommendations of SACMA shows that all listed companies must report to SACMA concerning their corporate governance compliance criteria as issued by SACMA or the reasons for incompliance if they exist. The disclosure contains board of directors’ formation, responsibilities, functions, committees of board of directors, remuneration and meetings of the board, remuneration and nomination of the committee and board members indemnification. In addition, SACMA stated that the best practice in corporate governance constitutes guiding principles for all the listed companies unless any other rules, laws or regulations need such a requirement.

This dissertation notes that even though corporate governance for long has been the subject for comprehensive research in developed nations, very little research has so far been conducted on the issue of corporate governance in business environment from developing nations.

Moreover, the limited research conducted approaches this issue on whether they should describe state of corporate governance in an official perspective or from a perspective of what should be the practical implications of its principles. As an example, Dahawy (2009, P. 6), evaluates Egypt’s corporate governance principles and realizes there is development in official regulations towards best practice application. This author later asserts that such developments are not sufficiently met by companies in Egypt via practical applications.

Al-Motairy (2003, P. 281), also conducted research on the corporate governance in Saudi Arabia. His conclusion is that there is need for issuance of guidance on management practices and financial management in corporations, revisiting of regulations to enhance use of recent corporate governance practices and establishment of an organization that may accelerate adoption of best corporate governance practices. Another research by the Center for International Private Enterprise studied corporate governance practice in Middle Eastern countries of Lebanon, Morocco, Jordan and Egypt and discovered that corporate governance practice is approached in various manners.

This highly depends on financial market sophistication in these countries. In short, all the research studies on corporate governance argue that there is need to have better corporate governance regulations in this region so that public confidence on financial markets may increase.


Relationship between capital structure and corporate governance has been an area of comprehensive research in developed countries but in developing countries limited research has so far been carried out to investigate business environment issue.

In this dissertation, there were hypotheses that were developed to arrive at the empirical results.

Ownership concentration hypothesis

This is taken to be one of the determinants of capital structure. Managerial shareholdings have been discovered to possess positive impact on family-owned businesses (Wiwattanakantang 1999, P. 371). Moreover, Hussainey and Al-Najjar also report positive relationship between insider ownership and the debt-to-equity ratio. Even if these results seem mixed, this area is revisited in examining the relationship between capital structure and the ownership concentration in Saudi Arabian companies.

The first hypothesis reads that a positive relationship exists between debt-to-equity ratio and ownership concentration.

Board size hypothesis

Most prior researches have established the relationship between capital structure decisions and the board size. Some of the studies have found mixed results. Others report in their findings that there is a significant negative relationship between debt-to-equity ratio and the board of directors.

Still others report a positive association between larger board sizes and high debt ratios as some state that there exists no relationship between the two.

The mixed results thus prompted this research to examine if there is association between capital structure and the board size in Saudi Arabian companies. The hypothesis here is that there is a relationship between debt-to-equity ratio and the board size.

Corporate governance reporting

A study by Li and Zhao (2006, P. 673), investigated association between corporate decisions and asymmetric information. Bharath et al (2009, P. 1) relied on novel information asymmetry index in examining the level of information asymmetry determinant in capital structure decisions.

The results here indicated that information asymmetry do influence capital structure decisions on U.S. companies. A positive relationship was found between the equity-debt-ratio and the information asymmetry. This is a study that concludes that organizations with higher levels of information asymmetry are highly likely to apply debt financing in their operations than equity.

Using the above information, this dissertation explored the role of information on capital structure decision in KSA. Corporate governance voluntary disclosure index is used as the measure of information environment in a firm. Due to mixed results from previous studies, the third hypothesis is set that a negative relationship exists between debt-to-equity ratio and corporate governance reporting.

Testing of the above hypothesis requires regression of debt-to-equity ratio on characteristics of corporate governance and other control variables. In this scenario, the dependent variable is the long term debt to equity ratio. The three independent variables are; ownership concentration, corporate governance reporting and board size. Board size is the number of both non executive and executive board directors.

Ownership concentration means total percentage of shares in the hands of owners while corporate governance is calculated as sentences which include at least some corporate governance information. In this study, the control variables are the growth opportunity (MB) and profitability (PROF).

Collection of data for analysis

Since our literature review is based entirely on secondary data, we have used the analysis of Hussainey and Al-Nodel (2008).

Data collected in this paper contains Saudi companies listed between early 2005 and early 2006. Most of the companies listed in the stock exchange by then were from different sectors including insurance, cement, agriculture, telecommunication, industrial, banks and services. Data on board size, price-to-book value ratio, profitability, ownership concentration and debt-to-equity ratio are from TADAWUL website.

Corporate governance disclosure index used by Hussainey and Al-Nodel has been used in analyzing the data.

Results analysis – Descriptive analysis/statistics

In this analysis maximum, standard deviation, mean and minimum are described. On average, the directors on board are around 8, a maximum of 11 and a minimum of 4. The mean corporate governance disclosure has five sentences, maximum of 21 sentences and the minimum corporate governance sentence is zero.
The sample considered has a variation in its financial variables.

Debt-to-equity ratio is between zero and 97 and the standard deviation is 32.576 while the mean is 24.52. Return on assets is between -37.3 and 71.74 while standard deviation is 13.82 and the mean 8.85. Share price to book value was between zero and 21, standard deviation of 5.336 and a mean of 5.03 (Hussainey and Al-Nodel 2009, P. 1). (Refer to appendix 3)

Further analysis shows that coefficient estimate for the board size has a positive value of 0.059 (Appendix 4).

These results show that larger board size puts Saudi companies in good positions in financing their operation via the debt. This is something that is consistent with idea that good quality of corporate governance seeks to improve financial performance of a company. This later leads to higher capability that the company in question may be in a position to obtain a debt. According to Liang and Zheng (2005, P. 31), boards with a large size may have more difficulty in arriving at an agreement due to conflicting views and opinions. Companies with large number of directors may not opt for equity financing as this calls for higher transaction cost in resolving coordination and communication dilemma.

Directors may also choose debt in financing their operations as this source would dilute equity of existing stakeholders and change their present position. This shows why we should accept the first stated hypothesis in our methodology.

Coefficient estimate for ownership concentration has a positive value (0.005). It indicates that the moment total share percentage is concentrated internally, then managers go for debt in financing their organizations’ operations. This is so because the debt may not dilute equity of existing shareholders which may eventually change their position. From this, our second stated hypothesis agrees.

Corporate governance disclosure used as the proxy for asymmetric information among investors and managers is expected to possess a negative value or to be significant statistically. From the analysis, there is a positive value for the coefficient estimate and this is an indication that companies with high corporate governance disclosure levels possess high DTE. This is a statistic that is significant but unfortunately it is not consistent with previous analysis.

Thus, hypothesis number three does not agree.

Correlation analysis between independent variables was not that high. In this case, highest correlation between share price to book value ratio and corporate governance is 43.5. This is a value that is statistically acceptable. This is a clear indication that there exists no multicollinearity problem among the studied independent variables.


From the start, this dissertation aimed at exploring the effect corporate governance mechanisms have on capital structure of the Saudi listed firms. Results presented in this dissertation prove that corporate capital structure decisions in this Middle Eastern country is influenced by same corporate governance determinants. The analysis of these firms indicate that ownership concentration and the board size act as prime drivers for capital structure decisions in Saudi Arabian listed companies.
This study had its own limitations as not all listed Saudi Arabian companies were put in the analysis.

Thus, this does not represent the Saudi companies collectively as this is just a sample of a big population of companies. The data used depended on the availability of websites for the respective companies.

Research conducted on Libyan listed companies seems to provide similar results with the ones this study has generated. In this study, it is argued that growing companies funding pressure on investment opportunities may exceed retained earnings and in relation to the ‘pecking order’ they may choose debt instead of equity (Hodgkinson, Bangassa and Buferna 2005, P. 11). It shows that information asymmetry theory is applicable in Libya where a positive association is expected between growth and financial leverage. When testing the hypotheses, associations between debt level and explanatory variables of tangibility, profitability, size and growth have been explored via ordinary least square regressions. Capital structure research exploring determinants of leverage based on total debt may conflict with differences between short-term and long-term debt.

This study was thus decomposed into short-term debt to total assets, total debt in relation to total assets and long-term debt in relation to total assets.

The summary conducted in this study provides statistics on various leverage measures and explanatory measures for the sample of Libyan companies. This is divided into sub-samples of public and private companies. The results indicate that Libyan companies have a productivity rate of 1.7 which is very low. On average, the growth rate is 13.48% with private companies showing a higher growth rate compared to public companies. Ratio of total debt is 53.9 to total book value for assets.

Highest value of debt is short-term.

Correlation matrix for these companies shows that size and growth have a positive association with profitability (Hodgkinson, Bangassa and Buferna 2005, P. 17). On the other hand, tangibility possesses a negative association with profitability. Results analyzed from the study of Libyan companies create a clear understanding of their financing behavior. This is another study that by using variables like growth, profitability, size and tangibility shows the capital structure of Libyan companies.

Appendix 1

Table (1): Saudi Arabia budgetary revenues, expenditures and net surplus or deficit 2005-2007

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Annual government budgeting ( estimates )

Million SaudiRiyals ($1= 3.75 SR)

Total revenues

Oil revenues

Non-oil revenues

Total expenditures

(Deficit)/ Surplus
































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