J. Int. Financ. Markets Inst.

Money 46 (2017) 98–115

Contents lists available at ScienceDirect

Journal of International Financial

Markets, Institutions & Money
j o u r n a l h o m e p a g e : w w w . e l s e v i e r . c o m / l o c a t e / i n t fi n

Corporate governance practices, ownership structure,

and corporate performance in the GCC countries
Abed Al-Nasser Abdallah a, Ahmad K. Ismail b,⇑
a
School of Business and Management, American University of Sharjah, P.O. Box: 26666, Sharjah, United Arab Emirates
b
Olayan School of Business, American University of Beirut, Lebanon

a r t i c l e i n f o a b s t r a c t

Article history: This study is motivated by highly concentrated ownership, the relatively large government
Received 17 January 2016 stake in listed firms in the GCC (Gulf Cooperative Council) region, and the rapid stock mar-
Accepted 15 August 2016 ket development and developing investor protection environment. The results point to
Available online 21 August 2016
heterogeneity in governance quality across exchanges. For the first time, we find that
the positive relationship between governance quality and firm performance is maintained
JEL classification: and is stronger at low levels of concentrated ownership. More interestingly, we find that
G30
the relationship between governance and firm performance is an increasing function of
Keywords: dispersed ownership and that the value addition of good governance is not necessarily
Corporate governance maintained at high levels of ownership concentration. Furthermore, such a relationship
Performance reaches its highest level when the government or local corporations are the firm’s major
Ownership structure shareholders.
Transparency Ó 2016 Elsevier B.V. All rights reserved.
Financial disclosure

1. Motivation and outline

The generally documented evidence on the relationship between the quality of corporate governance and shareholders’
value and/or corporate performance is positive, regardless of which governance or investor protection metric is used, coun-
try level or firm level (see for example Gompers et al., 2003; Bebchuk et al., 2009; Brown and Caylor, 2006; Starks and Wei,
2013 and Cheung et al., 2014).
Research shows that an optimal system of governance for all firms and all countries is nonexistent (Castrillo et al., 2010),
therefore ‘‘one size does not fit all” and corporate governance standards cannot be consistently applied to different struc-
tures. Additionally, some studies suggest that effective corporate governance depends on ‘‘the alignment of interdependent
organizational and environmental characteristics” (e.g., Aguilera et al., 2008; Aguilera and Desender, 2012; Filatotchev et al.,
2006).1 Desender et al. (2013) offer support for the view that the effectiveness of corporate governance mechanisms must
be considered conditional on the ownership structure of the firm. Their results for Continental European companies disclose
that board independence and audit services are complementary for dispersed ownership only. The authors suggest that own-
ership concentration and board composition become substitutes in terms of monitoring management and that the strength of
this substitution effect depends on the type of controlling shareholder as well. Moreover, Aguilera and Crespi-Caldera (2016)
argue that ownership can be easily compared across countries but corporate governance practices differ significantly across

⇑ Corresponding author at: Olayan School of Business, American University of Beirut, Bliss Street, P.O. Box: 11-0236, Beirut, Lebanon. Fax: +961 1 750214.
E-mail addresses: abedabdallah@aus.edu (A.A.-N. Abdallah), ai05@aub.edu.lb, phd98ai@yahoo.com (A.K. Ismail).
1
See Desender et al. (2013) page 823.

http://dx.doi.org/10.1016/j.intfin.2016.08.004
1042-4431/Ó 2016 Elsevier B.V. All rights reserved.
 A.A.-N. Abdallah, A.K. Ismail / J. Int. Financ. Markets Inst. Money 46 (2017) 98–115 99

firms’ ownership concentration. Therefore, they propose that ‘‘future research should draw on micro data on firm specific owner-
ship structures and their corporate governance practices to better understand the cross-national diversity of governance and its mean-
ings and consequences”. In fact, our paper aims to fill this gap in the literature.
Under the Anglo-Saxon dispersed ownership structure, the nature of conflict of interest is between shareholders and
managers and therefore, the set of corporate governance practices tries to align the interests of these two groups in order
to protect shareholders. In this spirit, La Porta et al. (1997) claim that ownership concentration with its diverse set of control
mechanisms is the response to inappropriate protection of investors. On the other hand, in other developed markets (e.g.
Continental Europe and Japan) and in emerging markets, high ownership concentration, gives rise to conflicts between con-
trolling shareholders and minority shareholders (Morck et al., 2005). This Principal-Principal conflict according to Young
et al. (2008) calls for a different bundle of governance mechanisms under which increasing ownership concentration cannot
be a remedy and may make things worse (Faccio et al., 2001) or render the performance of the firm inefficient (Goergen,
2014). Consequently, studies that test the relationship between ownership concentration and firm performance produce
conflicting results (see for example Fama and Jensen, 1983; Demsetz, 1983; Chang, 2003; and Demsetz and Villalonga,
2001; Grant and Kirchmaier, 2004; Cheung, 2010; and Vintila and Gherghina, 2014 among others).
Therefore, different levels of corporate governance may trigger different levels of ownership concentration across coun-
tries, while the impact on performance may not be predictable. Thus so far, and to the best of our knowledge, no studies have
explored the effect of ownership characteristics on the association between governance and performance. Stated differently,
a further dimension that this paper tries to explore is how the relationship between corporate governance and performance
is affected by different levels of concentrated ownership and also by different types of ownership.
The GCC (Gulf Cooperative Council) region is an ideal platform to conduct our analyses and draw conclusions that could
be applicable to other emerging markets as well for various reasons. First, the ownership structure is highly concentrated in
this region with large block-holders such as wealthy families, government and quasi government institutions (Santos, 2015).
For instance, it is noted that approximately one-third of the market’s total capital of Saudi listed firms is owned by the gov-
ernment (including public pension funds), and another one-third is owned by founding families.2 The concentrated owner-
ship also applies to the whole GCC region as the mean proportion of shares held by large block-holders in the GCC region is
between 45% and 56%.3 On the other hand, when examining the type of owner, the mean proportion of shares held by the gov-
ernment is around 25%.4 Secondly, financial markets in the region have grown substantially in the recent two decades and have
attracted regional and international investors, which necessitated enhancing transparency and investor protection. Such a
development in financial markets led Morgan Stanley Capital International (MSCI) to include UAE and Qatari stock exchange
markets in the Emerging Markets Index from May 2014. According to Kem (2012), compared to global total, share volume in
the GCC markets represented 0.8%, while banking assets were 1.1% by the end of 2010, and equity market capitalization stood
at 1.3%, whereas debt securities outstanding represented only 0.2%. Relatively speaking, Kem (2012, p.10) states that the ‘‘GCC’s
debt markets are, around half the size of Asian or Latin American markets, and just 70% of the relative size of these markets in Sub-
Saharan Africa. Equity markets fare better, making up 75% of GDP which compares favorably with the 58% observed on average in the
emerging economies. The share of banking assets, 123% of GDP also lies above the 89% average of the GCC’s peers in the emerging econ-
omies”. However, Kem (2012) argues that despite this small market size, GCC markets play an important role in the global cross-
border issuance of debt instruments since investors have easy access to these instruments.5 According to (Kem, 2012), institu-
tional investors play a major role in the GCC economies. The total value of assets managed by the region’s institutional investors
estimated at 3.6 trillion dollars, corresponding to approximately 370% of GDP in the region. This is way above the international
average of institutional assets to GDP of around 230%, and represents 2.5% of the institutional assets that are managed globally.
Thirdly, although in the recent years awareness of good governance and improved disclosure have developed gradually,
yet full adoption of governance practices and transparency measures still faces challenges as a result of the conservative and
protectionist investment culture in the region which is manifested by weak disclosure of information, and unwillingness to
relinquish ownership and control by large block-holders.
We use a unique data set including all the publicly listed firms in the GCC region for which measures of governance and
ownership structures are available for the first time for the period 2008–2012. For the final sample of 532 firms, the initial
results show heterogeneity in Corporate Governance scores across the GCC exchanges with Muscat, Bahrain and Abu Dhabi
being in the lead, while Riyadh and Kuwait are at the very bottom. Using three measures of firm performance; these are the
Tobin-Q, ROA, and ROE, we find that well governed firms outperform other firms in the sample, which is consistent with
previous studies. Nevertheless, when we add the ownership concentration dimension we document for the first time that
ownership concentration alters the relationship between governance and performance. Namely, we find that the positive
relationship between governance and performance is maintained for majority shareholders owning at least 5% and 10%,
but not for higher levels of concentration, that is, for holding percentages higher than 20% or 25%, there is no association

2
Source: Corporate Governance Country Assessment Kingdom of Saudi Arabia, the World Bank, February 2009.
3
Amico (2014) notes that Free float in the region is very low, despite standards for IPOs that require companies to list a minimum of 40% of their equity (e.g.
in Oman) and over 55% of their equity in the UAE. For example, for the largest 400 listed companies, the average free float oscillated between 45 and 48% in the
past five years (MSCI, 2014) with Kuwait, and the UAE, having free float exceeding 50% of market capitalization (World Bank, 2011).
4
Source: Ownership Structures in MENA Countries: Listed Companies, State-Owned, Family Enterprises and some Policy Implications, OECD 2006.
5
Kem (2012, p. 16) states that ‘‘In 2011, almost 70% of all issuances were reported to have been co-listed on international exchanges, with Germany, the UK, and
Luxembourg as the most important locations for secondary listings”.
100 A.A.-N. Abdallah, A.K. Ismail / J. Int. Financ. Markets Inst. Money 46 (2017) 98–115

between governance and corporate performance. Furthermore, and equally interestingly, the magnitude of the effect of gov-
ernance on firm performance decreases with the increase in the level of ownership concentration. In other words, for firms
with more dispersed ownership (level of ownership concentration at least 5%), better corporate governance leads to a much
better performance than for firms with less dispersed ownership (level of ownership concentration at least 10%). These find-
ings are consistent with the notion that concentrated ownership creates agency problems between majority shareholders
and minority shareholders, in a way that makes the performance of the firm inefficient (Faccio et al., 2001 and Goergen,
2014).
We also report further interesting results for the different types of majority ownership. We document that this bonding
relationship between corporate governance and firm performance reaches its highest level when governments are the
majority shareholders of the firm. This is also a new finding that is not reported in earlier studies.
The rest of the article is organized as follows: Section 2 presents a review of the relevant literature; Section 3 describes
the sample and methodology used in this article; Section 4 discusses the empirical results; and Section 5 concludes and indi-
cates implications and limitations.

2. Literature review

2.1. Governance and regulations in the GCC region

Regulators of financial markets in the region and other international and independent bodies, such as the International
Finance Corporation (IFC) and the Organization for Economic Co-operation and Development (OECD), have been active in
promoting a culture of investor protection and good governance practices in the region for the last two decades, which
resulted in drafting governance codes by the GCC member states since 2002 starting with Oman and ending with Bahrain
in 2010 and Kuwait in 2013.6 These codes mainly differ by their enforcement requirement. For instance, almost all the GCC
countries have chosen voluntary compliance (‘‘Comply-or-Explain”), whereas the UAE opted for mandatory compliance (‘‘Com-
ply or-Pay Penalty”). On the other hand, these codes have other similar provisions such as Board composition,7 but they use
varying definitions of Director Independence. Three of the Codes recommend ongoing professional board development pro-
grams for the directors (Qatar, Saudi Arabia and UAE).8 As for Board Committees, all codes require setting up an Audit Commit-
tee which is composed mostly of independent non-executive directors. The duties of such committee are well stated in all these
codes. Bahrain and Oman are setting strongest standards in terms of disclosure of remuneration. Bahrain is the only GCC coun-
try calling for shareholder approval for remuneration related matters, which is in line with international best practice.
Family ownership is the foundation of the GCC economy since family businesses in the region generate around 80% of
gross domestic product (GDP) outside the oil sector. Nonetheless, the increase in the corporate governance awareness across
all GCC markets makes the establishment of good governance mechanisms vital for the long-term survival of these busi-
nesses, though not a current strategic priority. A survey by Pearl Initiative and PWC (2012), which interviewed over a hun-
dred family firms in the GCC region, shows that though the majority of those firms believe in the importance of corporate
governance for securing the long-term health of their businesses, they consider it to be less important than other challenges
they currently face such as operational and commercial concerns and overall profitability.
It is also worth noting that the governance of family businesses in the GCC region is faced with issues such as succession and
management of conflict, which are both often directly related. Other governance issues include transparency and accountabil-
ity, formalizing management structures, improving rules and processes and the need for better practices at Board level.

2.2. Corporate governance and performance

Many empirical studies explore the effect of the quality of a firm’s corporate governance on its shareholders’ value. As a
proxy for the quality of corporate governance, researchers use various types of governance indices. Some of these indices are
based on charter provisions (Gompers et al., 2003; Bebchuk et al., 2009); others are based on a combination of charter pro-
visions and board characteristics (Brown and Caylor, 2006); and still others measure factors related to the corporate gover-
nance regime in the firm’s home country (Starks and Wei, 2013). Regardless of which index is used, however, the majority
indicates a positive association between corporate governance quality and shareholder returns.
Gompers et al. (2003) find that firms with stronger shareholders’ rights have higher firm value, profits, sales growth, and
lower capital expenditures, while also making fewer corporate acquisitions. Core et al. (2006) find that weak governance
firms underperform strong governance firms. Whereas Bebchuk et al. (2009) construct an entrenchment index with six
key provisions9 and find similar results to Gompers et al. (2003) with no importance to the remaining 18 provisions. Similar

6
Kuwait’s Governance Code has not yet come into force.
7
For instance, they all call for having majority non-executive directors, at least one third of the board member should be independent, the roles of the CEO
and the Chairman of the Board should be separated etc. For a detailed review of these codes please see the report titled ‘‘Hawkamah Brief on Corporate
Governance Codes of the GCC”.
8
Bahrain and Oman address the need for Board evaluations.
9
This is BCF index (Four of these six provisions limit shareholder voting power (staggered boards, limits to bylaws amendments, supermajority requirements
for charter amendments, and mergers, poison pills and golden parachutes).
 A.A.-N. Abdallah, A.K. Ismail / J. Int. Financ. Markets Inst. Money 46 (2017) 98–115 101

evidence is documented in Brown and Caylor (2006) using a (Gov-Score) consisting of 51 governance mechanisms and in Bhagat
and Bolton (2008) who find that better governance is positively correlated with better operating performance.
On the other hand, the majority of studies in emerging markets provide supporting evidence to the positive association
between good governance and good corporate performance or valuation (e.g. Klapper and Love, 2004 [14 emerging markets];
Leal and Carvalhal-Da-Silva, 2005 [Brazil]; Black et al., 2006a [Korea]; Black et al., 2006b [Russia]; Zheka, 2007 [Ukraine];
Black et al., 2008 [Korea]; Cheung et al., 2008 [China]; Cheung et al., 2011 [Hong Kong]; and Srairi, 2015 [GCC]). For instance,
Black et al. (2006b) find a strong association between governance and firm market value for Russian firms. In another study,
Black et al. (2008) use Korean panel data and find similar evidence. While Cheung et al. (2008) find similar evidence for 100
large firms in China, Cheung et al. (2011) find that firms in Hong Kong that exhibit improvements (deterioration) in the qual-
ity of corporate governance display a subsequent increase (decrease) in market valuation.
Recent studies explore different aspects that affect the relationship between corporate governance and performance.
Cheung et al. (2014) use data for China, Hong Kong, Indonesia, Philippines, and Thailand, and report a positive relationship
between each of the countries’ corporate governance practices and firm’s performance. Cheung et al. (2015) find supportive
evidence to the relationship between stock liquidity as an indication of good monitoring by block-holders through institu-
tional ownership and firm performance. Qian and Yeung (2015) find that bank’s inefficiency weakens corporate governance,
which in turn hurts firm performance. Similarly, Naushad and Abdul Malik (2015) find evidence that supports the expected
positive relationship between corporate governance and performance for 24 banks operating in the GCC region. In a similar
study, Srairi (2015) uses data from the 2011–2013’s annual reports of the 27 Islamic banks operating in the GCC region and
finds a positive relationship between governance quality and performance.
The recent financial crisis casts doubts about governments’ enforcement in promoting best practices corporate gover-
nance, and also about the effectiveness of these practices in encouraging a fair distribution of wealth in the stock markets,
and in preventing financial crisis. In this respect, using data from 2007 and 2008 for 296 firms from 30 countries, Erkens et al.
(2012) find that firms with higher institutional ownership and more independent boards experienced bad stock performance
compared to other firms in the sample. On the contrary, Gupta et al. (2013) report statistically significant differences in stock
performance (as measured by buy-and-hold stock returns) between well governed firms and poorly governed firms.
In sum, the majority of the previous studies provide strong evidence that good corporate governance predicts firm per-
formance. Hence, we develop the following hypothesis:

H1. Firm performance is positively related to its level of corporate governance.

2.3. Corporate ownership and performance

The literature on ownership structure and performance provides inconclusive evidence. For instance, Demsetz and Lehn
(1985) offer evidence of the endogeneity of a firm’s ownership structure and find no relation between profit rate and own-
ership concentration. Similarly, Morck et al. (1988) document no such relation between ownership concentration and var-
ious performance measures including Tobin’s Q. Conversely, McConnell and Servaes (1990) find a significant positive
association between Tobin’s Q and the percentage ownership of institutional investors. Consistently, Dahlquist and
Robertsson (2001) report a positive association between Swedish firms’ performance and foreign institutional investors’
holdings. Demsetz and Villalonga (2001), on the other hand, account for the endogeneity of ownership structure and find
no relationship between ownership structure and performance for US firms.
In the context of emerging market, Yudaeva et al. (2003) find that firms with foreign ownership are more productive than
domestic firms in the Russian market. In a similar vein, Chang (2003) studied the chaebol families and their affiliates in Korea
and finds no evidence that links concentrated ownership to better firm performance. However, Grant and Kirchmaier (2004)
observe that ownership structures in Europe are not consistent with value maximization principles and show that dominant
shareholders destroy value. Whereas Choi and Hasan (2005) find that the level of foreign ownership is positively associated
with bank’s return and negatively associated with bank’s risk in Korea.
Other studies in emerging markets that examine the issue of ownership and performance also provide conflicting evi-
dence. These include Xu and Wang (1999) [China], Welch (2003) [Australia], Leal and Carvalhal-da-Silva (2005) [Czech
Republic ], Earle et al. (2005) [Hungry], Kapopoulos and Lazaretou (2007) [Greece], Ke and Isaac (2007) [China]; Grosfeld
and Hashi (2007) [Poland and Czech Republic]; Brouthers et al. (2007) [Romania]; Hu and Izumida (2008) [Japan], Perrini
et al. (2008) [Italy]; Florackis et al. (2009), and Vintila and Gherghina, 2014 [Romania]; Wahba, 2014 [Egypt]; Qian and
Yeung (2015) [China], and Nguyen et al. (2015) [Singapore and Vietnam].
Nguyen et al. (2015) verifies the widely held view of agency theory about the efficient monitoring effect of large
shareholders in Singapore and Vietnam. They find evidence of a positive effect of ownership concentration on perfor-
mance. They also find that the quality of the national governance does matter in explaining the effect of concentrated
ownership on firm performance. On the other hand, Almudehki and Zeitun (2013) explore the effect of different own-
ership dimensions (board ownership; foreign ownership, institutional ownership, and ownership concentration) on the
performance of 29 firms listed on Doha Stock Exchange during the period 2006–2011. They find that firm performance
is impacted by board, foreign, and concentrated ownership. Likewise, Zeitun (2014) focuses on the whole GCC markets,
and finds that ownership structure, ownership concentration, and government ownership positively affect the perfor-
102 A.A.-N. Abdallah, A.K. Ismail / J. Int. Financ. Markets Inst. Money 46 (2017) 98–115

mance of firms in the these markets. Nonetheless, he finds that institutional and foreign ownership have no impact on
performance of these firms.10 Arouri et al. (2014) report different results for 58 banks operating in the GCC markets. They
find a positive impact of family, foreign, and institutional ownership on bank performance, but no impact of government
ownership on performance.
In addition, the aforementioned discussions suggest that different levels of concentrated ownership (5%, 10%, 20%, and
25%) might have different effects on firm performance. Having said that, it also can be argued that highly concentrated own-
ership can replace weak governance, and monitor the actions of managers, which positively affects financial performance
(Grossman and Hart, 1986; Hu and Izumida, 2008; Almudehki and Zeitun, 2013; Nguyen et al., 2015). On the other hand,
a high level of ownership concentration and hence too much interference with the management decisions might hurt the
financial performance of the firm, especially if block-holders seek private benefits of control as argued by Goergen (2014).
In this case, a lower level of ownership concentration might be the optimal solution. For example, Jameson et al. (2014) find
that controlling shareholders who are on the board of management of firms in India negatively affect the performance of
these firms.
Accordingly, given the conflicting theories and evidence in this respect, we propose a significant effect of ownership con-
centration on the relation between governance and performance but do not establish any direction for this relationship.
Thus we formulate the following hypothesis.

H2. The relationship between corporate governance and performance is affected by different levels of concentrated
ownership.

Moreover, prior literature provides inconclusive evidence also about which type of ownership affect performance (e.g.
Zeitun, 2014; Arouri et al. 2014), hence we also develop a non-directional hypothesis as follows:

H3. The relationship between corporate governance and firm performance is affected by the type of concentrated
ownership.

3. Sample, methodology and descriptive statistics

3.1. Sample and methodology

The sample consists of all firms listed in the stock exchanges of the GCC countries for which the data is available for the
period 2008–2012 on Thomson Reuters Zawya database and on Datastream. Our source for collecting governance data is the
National Investor’s report (The National Investor, 2008, 2009).11 The National Investor (TNI) in cooperation with Hawkamah
(The Institute of Corporate Governance) developed the BASIC (Behavioral Assessment Score for Investors and Corporations) for all
publicly listed firms in the GCC region (581 companies). BASIC measures 43 parameters encompassing three different sub-
groups (Trading History, Corporate Communications and Disclosure).12 Each parameter is given one point and then the total
score is converted into an index with a maximum value of 10 for a complete score of 43, for instance if a firm scored 30 points
then this is converted as follows: (30/43) ⁄ 10 = 6.98 and so on.13
Our measure of governance is similar to other measures used in the literature for instance; Klapper and Love (2004)
employ a governance score compiled by Credit Lyonnais Securities Asia (CLSA). The CSLA score is a composite of 57 binary
(yes/no) questions covering seven different categories: (1) management discipline, (2) transparency and disclosure, (3) board
independency, (4) board accountability, (5) management accountability, (6) investor protection and (7) social awareness.
Durnev and Kim (2005) use the CLSA and a disclosure practices score prepared by Standard & Poor’s (S&P) to test the asso-
ciation between corporate governance and valuation for a sample of firms from 27 countries. The S&P score consists of infor-
mation regarding whether a firm discloses information on 91 items that are divided into three subgroups: (1) ownership and
investor relations, (2) transparency and disclosure, and (3) board structure. Chong et al. (2009) construct an index with 55
governance practices that Mexican firms can voluntarily commit to and demonstrate a significant impact of corporate gov-
ernance on valuation and operating performance.
For a sample of Brazilian firms, Leal and Carvalhal-da-Silva (2005) construct a corporate governance index with 24 binary
(yes/no) questions. The questions are classified into four groups: (1) disclosure, (2) board composition, (3) conflicts of inter-
est, and (4) shareholder rights. Da Silveira and Barros (2007) use an index with 20 questions taking into consideration four
important aspects of corporate governance: (1) access to information, (2) information content, (3) board structure and (4)
ownership structure for the year 2002. Both studies find a positive link between their indices and valuation.

10
His results suggest that the age and size of the firm have positive and significant effect on firm performance.
11
Back to BASICs: An alternative look at liquidity, volatility and transparency, 2008. And BASIC Evolution: An alternative look at liquidity, volatility and
transparency, 2009.
12
The 43 parameters are presented in Appendix A.
13
These are the calculations of The National Investor and Hawkamah. We take the BASIC score from our data source as is without any interference in its
estimation.
 A.A.-N. Abdallah, A.K. Ismail / J. Int. Financ. Markets Inst. Money 46 (2017) 98–115 103

The main feature of BASIC is that a higher score indicates a lower corporate governance risk. This applies also for each
component and every category. The BASIC ranges from zero to ten and based on the previous literature it is expected that
the closer a company’s score is to ten, the better its corporate governance is.
Testing the effect of corporate governance practices on firm performance in the presence of concentrated ownership and
ownership structure triggers the issue of endogeneity. Abdallah et al. (2015) argue that endogeneity results from the omis-
sion of explanatory variables in the model, which leads to a correlation between the model error term and its explanatory
variables. This will violate a basic assumption of Ordinary Lest Squares (OLS) model. In addition, they argue that endogeneity
might also arise because reverse relationship between the dependent variable and one of more explanatory variables. Pre-
vious studies (e.g. Demsetz, 1983; Demsetz and Villalonga, 2001, among others) point out to a reverse-relationship between
ownership structure governance, and performance. The presence of endogeneity along with unobservable firm fixed effects
produces biased and inconsistent ordinary least squares (OLS) estimators (Bhagat and Bolton, 2008; and Nguyen et al., 2015).
Nguyen et al. (2015) argue that although the use of OLS with fixed effects controls for the time-invariant unobserved firm’s
(fixed) effects, it still does not fix the problem of endogeneity of the independent variables. Bhagat and Bolton (2008) point
out to the fact that the inter-relationship between ownership structure, governance and performance can only be controlled
for by designing a system of simultaneous equations. Given the different choices of simultaneous equations such as 3-
equation model, 2SLS Demsetz and Villalonga (2001) and Nguyen et al. (2015), among others, suggest the use of Blundell
and Bond’s (1998) generalized method of moments (GMM) to correct for the endogeneity, which is on the contrary to
2SLS and 3SLS does not rely on external exogenous instruments, which is difficult to categorize (see also Wintoki et al.,
2012).
Therefore, to test the effect of corporate governance practices in the GCC countries on the firm’s performance while at the
same time accounting for endogeneity, we employ the following Instrumental Generalized Method of Moment (GMM)
regression with robust standard error and firm clustering. The validity of the instrument test or over identification test
can be measured by conducting the Hansen’s J test.

Performancetþ1 ¼ a þ b1 CORPGOV t þ b2 Lev eraget þ b3 FCF t þ b4 CAPEX T þ b5 SGRt þ b6 TOt þ b7 MTBV t þ Industry þ Year
ð1Þ

Where the Instrumental Variable CORPGOV ¼ f ðTA; CountryÞ ð2Þ

Performancet+1 is one of three measures as (1) the firm’s Tobin-Q measured as the natural logarithm of the book value of
assets less book value of equity plus market value of equity divided by book value of assets, (2) the return on assets (ROA)
that is calculated as the natural logarithm net income scaled by the book value of assets, and (3) the return on equity (ROE),
which is calculated as the natural logarithm of net income scaled by the book value of equity, all are calculated at time t + 1.
CORPGOVt is the corporate governance measures, which were explained before, and these are: BASIC, Disclosure, Corporate
Communication, and Trading History, at time t. As the BASIC score and its components were made available to the public
in 2008 and 2009, only, we match the firm’s BASIC score (and its components) that was released in 2008 with the firm per-
formance during 2009. We do the same for the BASIC score of 2009, where we match the score of each firm with its perfor-
mances in 2010, 2011, and 2012. It is worth noting that for the years when the BASIC score and its components data were not
released we follow the same procedure of Gompers et al. (2003) and use the previous year’s data.
Following previous studies (e.g., Black et al., 2006a,b; Braga-Alves and Shastri, 2011, and Cheung et al., 2011), we control
for the variables that affect a firm’s performance such as Debts to Assets ratio (Leverage) and in this case we use the net debt
in the numerator, which is defined as total debt minus Cash and Marketable Securities. We also use Free Cash Flow scaled by
total assets (FCF), capital expenditures scaled by total assets (CAPEX), sales growth rate (SGR), the natural logarithm of the
percentage of traded shares from total share outstanding or share turnover (TO), and Market to Book value of equity (MTBA),
at time t. We also control for the firm’s country of origin (Country), its industry (Industry), and years (Year). All variables are
winsorized at 1% level.
In fact, our use of the instrumental variable is in line with previous studies that support the use of size as instrumental
variable for the governance index, (see e.g. Himmelberg et al., 1999; Black et al., 2006a,b; Leal and Carvalhal-Da-Silva, 2005).
For instance, Leal and Carvalhal-Da-Silva (2005) argue that there is a ‘‘scale factor” that renders adopting better corporate
governance practices easier and more advantageous for larger firms. Additionally, Klapper and Love (2004) note that there
is a large variation in their measure of governance quality within specific countries.
Initially, we start by validating the results of earlier studies, for non GCC firms, and test the relationship between corpo-
rate governance and performance using GMM regressions. In the second stage we explore how such a relationship is affected
by different percentages of ownership concentration by running the same regression for each level of concentrated owner-
ship, where majority shareholders own at least 5%, 10%, 20%, or 25%. In the third stage of the analysis, we run the same model
for each type of ownership; corporate, government, private and foreign ownership. By doing so, we test if the effect of cor-
porate governance on a firm’s performance varies across different types of majority ownership. We label the type of own-
ership as corporate, private, government, and foreign, for the percentage of shares owned by a local corporate investor
(Institutional Investor), an individual wealthy investor (private owner or a wealthy family), government, and foreign inves-
tor, respectively. We collect ownership data from Zawya, which is a Thomson Reuters Database for the MENA region. We
collect all other accounting and market values variables from Thomson Reuters Datastream.
104 A.A.-N. Abdallah, A.K. Ismail / J. Int. Financ. Markets Inst. Money 46 (2017) 98–115

3.2. Descriptive statistics

Table 1 reports summary statistics for the BASIC scores of firms as disclosed in the Basic scores of 2008 and 2009, dis-
tributed by the listing location. The table shows evidence of heterogeneity in corporate governance scores across the GCC
exchanges. For both years, 2008 and 2009, firms listed in Muscat stock exchange (Oman) appear to have the highest mean
(median) BASIC score, followed by those listed in Manama (Bahrain), Abu Dhabi stock exchanges, Doha (Qatar), Dubai, and
the lowest are firms listed in Riyadh (Kingdom of Saudi Arabia) and Kuwait. The Table also shows evidence of an improve-
ment in the Basic scores for most companies listed in the GCC markets, except those listed on Dubai Financial Market. The
average Basic score for all GCC listed firms is 3.57 for 2008, which is lower than 3.9 for 2009. Similar results are reported for
each stock exchange. For example, for Muscat, the mean Basic score is 4.69 in 2008 but increases to 5.05 in 2009, whereas for
Bahrain, it is 4.34 in 2008 and increases to 4.62 in 2009.
Table 2 presents the results of the variables descriptive statistics after winsorizing the data at the 1% level. In terms of
ownership, on average, 69.3% of majority shareholders own at least 5% (hperc5) of majority shares, followed by 46.5% of
majority shareholders hold at least 10% (hperc10), 28.8% own at least 20% (hperc20), and 22.1% own at least 25% (hperc25).
On the other hand, 42.8% of majority shareholders are local corporations (Shacorp), whereas, 15.6% are individual investors,
14.4% are government, and finally 10.4% are foreign shareholders. This indicates that the ownership in the GCC market have a
low-float ratio, and also is highly concentrated.
Table 3 reports the results of the correlation matrix of the various variables used in the analysis such as: the governance
variables, which include the BASIC score and its three main components, and the other control variables. Table 3 shows that
the three components of the BASIC score are all positively correlated with the BASIC, and the highest is between the BASIC
and corporate communication (78.9%). All other correlations are very low and is an indication of the existence of no multi-
collinearity problem in the analysis.

4. Empirical results

4.1. Univariate analysis

The preliminary analysis starts by stratifying the sample into three terciles according to the level of the BASIC score (Low,
Medium and High)14. Table 4 shows that firms with high BASIC score (better governed firms) have a better performance than
those with low BASIC score. For example, Tobin-Q for firms with high BASIC score is 0.777 compared to 0.731 for medium and
0.740 for low BASIC score firms respectively, and the difference in the mean Tobin-Q is significant at the 1% significance level as
evidenced by Kruskal-Wallis statistics (KW_X2). Similar results are reported for ROA and ROE, which lends support to the fact
that GCC firms with good governance system enjoy a better performance than those with weak governance system. The Free
Cash Flow to Assets (FCF), which we use as a proxy for cash holding, is slightly higher for better governed firms (5.7%) than
for badly governed firms (4.4%). The latter observation on cash holding implies that better governed firms (those with High
BASIC scores) are less likely to exhibit agency type of behavior and therefore, this could help explain why they have better per-
formance than badly governed firms, which is consistent with the free cash flow hypothesis (Jensen, 1986). The table also doc-
uments that better governed firms have more debt holding as the Net Debt to Assets ratio is 12.9% compared to 8.8% for badly
governed firms.15 In addition, better governed firms make less capital expenditure (4.4% vs. 4.8%) but their shares are traded
more than badly governed firms with TO of 0.6% vs. 0.4%, respectively, which is evidence of the higher liquidity of their shares.
As for the ownership type, it is interesting to note that the percentages of firms with low BASIC scores are owned largely
by local corporations (CORPORATE) and PRIVATE (individual) investors, with ownership percentages of 48% and 17.3%,
respectively. These percentages are higher than those of better governed firms (39.5% and 14%, respectively). Conversely,
Table 4 shows that GOVERNMENT and FOREIGN investments are directed more towards firms with better governance, with
ownership percentages of 20.4% and 14.7%, respectively. These percentages are more than double those of badly governed
firms (9.9% and 7%, respectively). As such, it can be argued that governments and foreign investors might contribute in
improving the governance practices of those firms. On the other hand, this could be an indicator that the parties involved
more in promoting good governance practices and transparency are investing in such firms because they simply expect good
governance to pay off.

4.2. Multivariate analysis

4.2.1. Impact of the BASIC score and its components

The results of the univariate analysis are supported by conducting regression analysis whereby the dependent variable is
one of the firm’s performance measures: Tobin-Q and ROA. Because the literature on corporate governance and performance
takes into account the possible endogeneity, and since using lagged independent variables may not fully account for such a

14
We sort the BASIC scores in either ascending or descending order and we split the sample into three sub-samples based on the value of BASIC. So the sub-
sample LOW consists of the first tercile (33%) of the sample firms with the lowest BASIC score, HIGH consists of the third tercile (33%) of the sample firms with
the Highest BASIC scores and so on.
15
The Net Debt is calculated as Total Debt less Cash and Marketable Securities.
 A.A.-N. Abdallah, A.K. Ismail / J. Int. Financ. Markets Inst. Money 46 (2017) 98–115 105

Table 1
Summary of BASIC score for the GCC markets.

N_Firms Mean Median Min Max p25 p75 STD

Basic scores as of year 2008
Abu Dhabi 62 4.13 4.155 1.53 6.23 3.65 4.73 0.84
Bahrain 45 4.34 4.98 1.39 7.49 2.05 5.74 1.81
Doha (Qatar) 38 4.03 3.985 1.71 6.33 3.53 4.5 0.96
Dubai 40 3.90 3.865 1.54 5.78 3.2 4.41 0.96
Kuwait City 175 2.64 1.99 1.29 5.55 1.71 3.81 1.18
Muscat-Oman 126 4.69 4.75 1.54 6.89 4.32 5.36 1.00
Riyadh (Saudi Arabia) 95 2.77 2.36 1.59 6.09 2.19 3.09 0.97
GCC 581 3.57 3.77 1.29 7.49 2.19 4.69 1.40
Basic scores as of year 2009
Abu Dhabi 63 4.38 4.16 2.32 7.28 3.73 4.84 0.95
Bahrain 46 4.62 4.78 1.38 7.95 3.68 6.02 1.78
Doha (Qatar) 55 4.40 4.37 1.61 7.46 3.45 5.15 1.26
Dubai 174 2.96 2.42 1.27 6.31 1.78 4.19 1.30
Kuwait City 123 5.05 5.21 1.90 6.79 4.63 5.75 1.03
Muscat-Oman 40 4.36 4.19 2.41 6.38 3.81 4.69 0.85
Riyadh (Saudi Arabia) 104 3.06 2.46 1.74 6.58 2.29 3.43 1.23
GCC 605 3.9 4.07 1.27 7.95 2.39 5.03 1.49

The table contains a summary of the BASIC score for those companies listed in the GCC markets and reported in the Basic report of 2008 and 2009. The BASIC
score is comprised of 43 parameters and these are reported in Appendix A along with those parameters for its components as well.

Table 2
Data descriptive statistics.

Variable NOBS Mean Max p25 p75

Basic 1669 4.016 7.46 3.12 5.07
Trading 1669 5.364 8.44 4.68 6.22
CorCom 1669 3.705 10 2.22 5.11
Disclosure 1669 4.076 128 2.69 5.38
Tobin-Q 1493 0.749 1.398 0.624 0.843
TA 1611 12.290 18.648 10.320 14.090
Leverage 1562 0.113 0.810 0.000 0.161
fcf_ta 1611 0.049 0.356 0.000 0.105
Capexd_ta 1547 0.044 0.407 0.002 0.055
SGR 1589 0.106 3.341 0.104 0.296
MTBV 1605 1.573 6.69 0.81 2.04
To 1519 0.006 0.131 0.000 0.004
ROA 1505 0.035 0.291 0.003 0.086
ROE 1556 0.042 0.507 0.000 0.163
Hperc5 1876 0.693 1 0 1
Hperc10 1876 0.465 1 0 1
Hperc20 1876 0.288 1 0 1
Hperc25 1876 0.221 1 0 0
Shcorp 1876 0.211 1 0 1
Shprivate 1876 0.167 1 0 0
Shgov 1876 0.079 1 0 0
Shforeign 1876 0.057 1 0 0

Governance measure is represented by the BASIC score and its three main components, which are Trading History (Trading), Corporate Communication
(CorCom) and Disclosure. The dependent variable is the firm performance, which is denoted by Tobin-Q, ROA, and ROE. Tobin-Q is calculated as the natural
logarithm of the book value of total assets minus the book value of total equity plus the market value of equity divided the book value of total assets. The
Return on Assets (ROA) is calculated as the natural logarithm of the Net Income divided by the book value of total Assets. The Return on Equity (ROE) is
calculated as the natural logarithm of the Net Income divided by book value of Equity. The explanatory variables are the natural logarithm of the book value
of assets (TA), sales growth rate (SGR), Market to Book value of equity (MTBV), Leverage and is calculated as Net Debt scaled by book value of assets whereby
Net Debt is calculated as Total Debt minus Cash and Marketable securities, free cash flow scaled by total assets (FCF), capital expenditure scaled by total
assets (Capexd), and shares turnover (to) measured as the natural logarithm of the total number of traded shares divided by the number of shares
outstanding. Hperc5, Hperc5, Hperc10, Hperc20, and Hperc25 represent the number of shareholders who own at least 5%, 10%, 20%, and 25% of the firm’s
traded shares. Shcorp, Shprivate, Shgov, and Shforeign stand for the number of firms owned by corporations, individuals, governments, or foreign share-
holders. All variables were winsorized at the 1% level. NOBS represents the number of firm-year observations.

problem, we decided to employ Instrumental Generalized Method of Moment (GMM) regression with robust standard error
and firm clustering. We mainly run Eq. (1). As specified in Section 3.1, however, we use four models each time and for every
corporate governance measure. That is, in model 1 and as a leading independent variable, we use the BASIC score as the main
governance measure; while in the three other models, we use each of the components of BASIC score, instead, as an inde-
pendent variable. The results, which are reported in Table 5, confirm the findings of the univariate analysis. The coefficients
 106
A.A.-N. Abdallah, A.K. Ismail / J. Int. Financ. Markets Inst. Money 46 (2017) 98–115
Table 3
Correlation matrix among the BASIC score components and control variables.

Basic Trading CorCom Disclosure Tobin-Q ROA ROE Leverage FCF TA Capexd SGR TO MTBV
Basic 1
Trd_Hist 0.288⁄⁄⁄ 1
CorCom 0.766⁄⁄⁄ 0.180⁄⁄⁄ 1
Disclosure 0.257⁄⁄⁄ 0.011 0.149⁄⁄⁄ 1
Tobin-Q 0.0788⁄⁄ 0.019 0.0377 0.0347 1
ROA 0.147⁄⁄⁄ 0.0630⁄ 0.124⁄⁄⁄ 0.0923⁄⁄⁄ 0.318⁄⁄⁄ 1
ROE 0.149⁄⁄⁄ 0.0413 0.150⁄⁄⁄ 0.0740⁄⁄ 0.267⁄⁄⁄ 0.843⁄⁄⁄ 1
Leverage 0.121⁄⁄⁄ 0.146⁄⁄⁄ 0.0836⁄⁄⁄ 0.00279 0.03 0.0274 0.0483 1
FCF 0.0476 0.0358 0.0489⁄ 0.0471 0.291⁄⁄⁄ 0.368⁄⁄⁄ 0.297⁄⁄⁄ 0.106⁄⁄⁄ 1
TA 0.276⁄⁄⁄ 0.367⁄⁄⁄ 0.566⁄⁄⁄ 0.0127 0.0626⁄ 0.0346 0.124⁄⁄⁄ 0.0951⁄⁄⁄ 0.0194 1
Capexd 0.039 0.0217 0.0465 0.033 0.198⁄⁄⁄ 0.208⁄⁄⁄ 0.156⁄⁄⁄ 0.237⁄⁄⁄ 0.209⁄⁄⁄ 0.0651⁄ 1
SGR 0.0193 0.0221 0.0327 0.00164 0.0647⁄ 0.130⁄⁄⁄ 0.108⁄⁄⁄ 0.035 0.0429 0.0632⁄ 0.0897⁄⁄⁄ 1
TO 0.0321 0.0713⁄⁄ 0.0411 0.0129 0.014 0.00092 0.0119 0.0395 0.0252 0.193⁄⁄⁄ 0.0124 0.0376 1
MTBV 0.00728 0.110⁄⁄⁄ 0.0195 0.00913 0.470⁄⁄⁄ 0.0115 0.0548⁄ 0.0683⁄⁄ 0.121⁄⁄⁄ 0.0863⁄⁄⁄ 0.0885⁄⁄⁄ 0.0574⁄ 0.0344 1

Governance measure is represented by the BASIC score and its three main components, which are Trading History (Trading), Corporate Communication (CorCom) and Disclosure. Tobin-Q is calculated as the
natural logarithm of the book value of total assets minus the book value of total equity minus the market value of equity divided the book value of total assets. The Return on Assets (ROA) is calculated as the
natural logarithm of the Net Income divided by the book value of total Assets. The Return on Equity (ROE) is calculated as the natural logarithm of the Net Income divided by book value of Equity. The table also
includes the book value of assets (TA), sales growth rate (SGR), Market to Book value of equity (MTBV), Leverage and is calculated as Net Debt scaled by book value of assets whereby Net Debt is calculated as Total
Debt minus Cash and Marketable securities, free cash flow scaled by total assets (FCF), capital expenditure scaled by total assets (Capexd), and shares turnover (to) measured as the natural logarithm of the total
number of traded shares divided by the number of shares outstanding. ⁄⁄⁄, ⁄⁄, ⁄ Denote significance at the 1%, 5% and 10% levels, respectively.
 A.A.-N. Abdallah, A.K. Ismail / J. Int. Financ. Markets Inst. Money 46 (2017) 98–115 107

Table 4
Univariate analysis for control variables, by the ranking of the BASIC score.

Variable Low Medium High KW_v2

NOBS Mean NOBS Mean NOBS Mean
Tobin-Q 478 0.740 496 0.731 482 0.777 (0.000)
TA 541 11.378 539 12.875 531 12.624 (0.000)
Leverage 523 0.088 522 0.121 517 0.129 (0.000)
FCF 541 0.044 539 0.044 531 0.057 (0.008)
Capexd 516 0.048 517 0.038 514 0.044 (0.098)
SGR 528 0.061 535 0.143 526 0.113 (0.014)
MTBV 538 1.579 534 1.532 533 1.607 (0.028)
TO 496 0.004 511 0.006 512 0.006 (0.460)
ROA 518 0.020 503 0.032 484 0.054 (0.000)
ROE 520 0.004 521 0.034 515 0.088 (0.000)
By shareholder type
Corporate 554 0.480 556 0.406 559 0.395 (0.029)
Private 554 0.173 556 0.151 559 0.140 (0.620)
Government 554 0.099 556 0.142 559 0.204 (0.009)
Foreign 554 0.070 556 0.104 559 0.147 (0.090)
KW_v2 (0.000) (0.000) (0.000)

Tobin-Q is calculated as the natural logarithm of the book value of total assets minus the book value of total equity plus the market value of equity divided
by the book value of total assets. The Return on Assets (ROA) is calculated as the natural logarithm of the Net Income divided by the book value of total
Assets. The Return on Equity (ROE) is calculated as the natural logarithm of the Net Income divided by book value of Equity. The other variables are the book
value of assets (TA), sales growth rate (SGR), Market to Book value of equity (MTBV), Leverage and is calculated as Net Debt scaled by book value of assets
whereby Net Debt is calculated as Total Debt minus Cash and Marketable securities, free cash flow scaled by total assets (FCF), capital expenditure scaled by
total assets (Capexd), and shares turnover (to) measured as the natural logarithm of the total number of traded shares divided by the number of shares
outstanding. Corporate, Private, Government, and Foreign stand for the fraction of shares owned by corporations, individuals, governments, or foreign
shareholders. All variables were winsorized at the 1% level. KW_v2 is the Kruskal Wallis rank test of significance across groups. NOBS is the number of firm-
year observations.

of the governance measures (BASIC score, Disclosure, and Corporate Communication) are all positive and significant, except
in model 4 where Trading History is used as a governance measure. These findings confirm our prediction that better gov-
erned firms enjoy a better performance and that they experience a higher market valuation as well. It also may imply that
awareness of the importance of good governance practices has increased over time, hence, leading to a better acceptance of
those practices by market participants, and to a more appreciation by investors for the impact of such practices on firm per-
formance.16 These findings are consistent with previous studies that find a positive relationship between the quality of corpo-
rate governance and firm performance. These include Gompers et al. (2003), Bebchuk et al. (2009), Brown and Caylor (2006),
Starks and Wei (2013), Klapper and Love, 2004; Leal and Carvalhal-Da-Silva (2005), Black et al. (2006a, b, 2008), Zheka
(2007), Cheung et al. (2008, 2011), Chong et al. (2009), and more recently Naushad and Abdul Malik (2015), who examine
the relationship between governance and bank performance in the GCC region.

4.2.2. Impact of the ownership concentration

The previous analysis showed that better governed firms experience better performance, after controlling for different
firm and country factors. We also showed that previous studies point out that a firm’s performance is also affected by the
ownership structure. It has been argued that ownership concentration mitigates agency problem because of the influence
that the major shareholder exercises over the firm’s management. Previous studies investigate only the relationship between
ownership concentration and firm performance, and produce conflicting results (see Fama and Jensen, 1983; Demsetz, 1983;
Chang, 2003; Demsetz and Villalonga, 2001; Grant and Kirchmaier, 2004; Cheung, 2010, among others).
In this section we aim to add a further dimension to the literature by examining the association between governance and
performance at different levels of ownership concentration.
Table 6 presents results of Eq. (1) for different levels of ownership concentration (majority shareholders owning at least
5%; 10%; 20%, and 25%). The variable of interest is the coefficient of the BASIC score variable. Table 6 shows the following:
first, the relation between corporate governance and a firm performance, be it Tobin-Q, ROA, or ROE, is positive and statis-
tically significant at the 1% level for holding percentages that are at least 5% and 10%. Secondly and most importantly, the
magnitude of such a relationship, (the BASIC variable’s coefficient), decreases with the increase in the percentage of concen-
trated ownership. This result, along with the insignificant BASIC coefficients in regressions (3, 4, 7, 8, 11, and 12), where own-
ership concentration is very high, i.e. at least 20% and 25%, provide new evidence on the relation between good governance
and performance, and simply imply that the value addition of good governance is not necessarily maintained at high levels of
ownership concentration.

16
The above argument and explanation are in line with the observations and conclusions of various bodies involved in promoting good governance practices
who believe that, as supported by previous empirical evidence in the USA and other countries, good governance practices are expected to lead to better firm
performance.
108 A.A.-N. Abdallah, A.K. Ismail / J. Int. Financ. Markets Inst. Money 46 (2017) 98–115

Table 5
Instrumental variables (GMM) regression with robust standard error, clustered by firm.

Dependent Tobin-Q ROA

Model (1) (2) (3) (4) (5) (6) (7) (8)
Basic Disclosure Corcom Trading Basic Disclosure Corcom Trading
Gov. measure 0.018⁄⁄⁄ 0.014⁄⁄⁄ 0.015⁄⁄ 0.007 0.016⁄⁄⁄ 0.011⁄⁄⁄ 0.014⁄⁄⁄ 0.002
(3.88) (2.64) (2.24) (0.25) (3.63) (3.47) (2.88) (0.44)
Leverage 0.045 0.023 0.049 0.005 0.036⁄ 0.054⁄⁄ 0.031 0.055⁄⁄⁄
(0.88) (0.53) (0.84) (0.12) (1.79) (2.22) (1.44) (2.62)
FCF 0.165⁄⁄ 0.233⁄⁄⁄ 0.144 0.273⁄⁄⁄ 0.234⁄⁄⁄ 0.308⁄⁄⁄ 0.222⁄⁄⁄ 0.300⁄⁄⁄
(2.47) (3.63) (1.55) (4.85) (5.76) (6.76) (4.89) (8.34)
Capexd 0.312⁄⁄⁄ 0.280⁄⁄⁄ 0.346⁄⁄ 0.191⁄ 0.096⁄⁄ 0.082⁄ 0.107⁄⁄ 0.041
(2.71) (2.66) (2.56) (1.90) (2.17) (1.71) (2.17) (0.94)
SGR 0.007 0.002 0.005 0.004 0.012⁄⁄⁄ 0.006 0.012⁄⁄⁄ 0.010⁄⁄
(0.74) (0.21) (0.56) (0.57) (2.82) (1.40) (2.93) (2.43)
TO 0.194 0.274 0.109 0.364 0.133 0.167 0.081 0.148
(0.64) (0.88) (0.34) (1.10) (0.59) (0.78) (0.33) (0.61)
MTBV 0.079⁄⁄⁄ 0.079⁄⁄⁄ 0.079⁄⁄⁄ 0.078⁄⁄⁄ 0.002 0.003 0.002 0.003
(10.83) (11.22) (10.55) (11.78) (0.66) (1.00) (0.74) (1.07)
Country Yes Yes Yes Yes Yes Yes Yes Yes
Industry Yes Yes Yes Yes Yes Yes Yes Yes
Year Yes Yes Yes Yes Yes Yes Yes Yes
_cons 0.175 0.311⁄⁄⁄ 0.152 0.633⁄⁄⁄ 0.034 0.115⁄ 0.056 0.145⁄⁄
(1.23) (3.24) (0.72) (5.26) (0.59) (1.87) (0.73) (2.54)
Wald_chi2 527.466 673.357 474.381 542.903 391.739 298.867 334.042 330.461
pv_Chi2 (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Hansen-J test of over-identification (p-value) (0.137) (0.517) (0.164) (0.130) (0.553) (0.157) (0.535) (0.320)

Governance measure is represented by the BASIC score and its three main components, which are Trading History (Trading), Corporate Communication
(CorCom) and Disclosure. The dependent variable is the firm performance, which is denoted by Tobin-Q and ROA. Tobin-Q is calculated as the natural
logarithm of the book value of total assets minus the book value of total equity plus the market value of equity divided the book value of total assets. The
Return on Assets (ROA) is calculated as the natural logarithm of the Net Income divided by the book value of total Assets. The explanatory variables are sales
growth rate (SGR), Market to Book value of equity (MTBV), Leverage and is calculated as Net Debt scaled by book value of assets whereby Net Debt is
calculated as Total Debt minus Cash and Marketable securities, free cash flow scaled by total assets (FCF), capital expenditure scaled by total assets
(Capexd), and shares turnover (to) measured as the natural logarithm of the total number of traded shares divided by the number of shares outstanding. All
variables are winsorized at the 1% level, and Z statistics are reported in parentheses. ⁄⁄⁄, ⁄⁄, ⁄ Denote significance at the 1%, 5% and 10% levels, respectively.

Our results are not in line with the prediction of agency theory about the efficient monitoring effect of large shareholders
in markets with highly concentrated ownership. Therefore they are inconsistent with the view that ownership concentration
is a positive function of a firm performance (Berle and Means, 1932; Jensen and Meckling, 1976) as managers exercise less
freedom in expropriating the firm’s resources (Amihud and Lev, 1981; Hill and Snell, 1989; Shleifer and Vishny, 1997). Our
results also contrast those of Nguyen et al. (2015) who find that ownership concentration has a positive effect on perfor-
mance in firms operating in Singapore and Vietnam.
However, our findings are consistent with the argument advanced in prior research (see e.g. Goergen, 2014) that high
level of ownership concentration creates agency problems between majority shareholders and managers/minority share-
holders, in a way that makes the performance of the firm inefficient or at best less efficient. Our results are also consis-
tent with the view that highly concentrated ownership becomes less effective in monitoring management actions and
promoting good performance (Sánchez-Ballesta and Gracía-Meca, 2007), and this is the case of inactive block-holders.
This can also be the case when large shareholders exercise sever monitoring over the firm and hence prevent managers
from making managerial decisions that maximize shareholders value, or because large shareholders exercise heavy mon-
itoring in order to extract private benefits at the expense of small shareholders (Earle et al., 2005; Perrini et al., 2008;
Grosfeld and Hashi, 2007).
These results are also consistent with the growing proposition that the performance effectiveness of corporate gover-
nance mechanisms depends on organizational and environmental characteristics (Kumar and Zattoni, 2013). They also sup-
port the view that effective corporate governance depends on ‘‘the alignment of interdependent organizational and
environmental characteristics” (e.g., Aguilera et al., 2008; Aguilera and Desender, 2012; Filatotchev et al., 2006). Our findings
also provide supporting evidence to Desender et al. (2013) who argue that the effectiveness of corporate governance mech-
anisms must be considered conditional on the ownership structure of the firm. Our findings are also similar to those of Hovey
et al. (2003) who find weak relation between ownership concentration and firm performance in China.
Our results fall in the category of papers that argue and find that diffuse ownership adds more value than concentrated
ownership (e.g. Demsetz and Lehn, 1985; Demsetz and Villalonga, 2001; Chang, 2003 and Grant and Kirchmaier, 2004).
For the first time, these results provide new evidence that contributes to the corporate governance literature, which sug-
gests that a well dispersed ownership strengthens the relationship between corporate governance and performance, while in
a concentrated ownership environment; good governance does not necessarily lead to better performance.
 A.A.-N. Abdallah, A.K. Ismail / J. Int. Financ. Markets Inst. Money 46 (2017) 98–115 109

Table 6
Instrumental variables (GMM) regression with robust standard error and firm cluster, by the holding percentages.

Dependent Tobin-Q ROA ROE

Model (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Sh% P Sh% P Sh% P Sh% P Sh% P Sh% P Sh% P Sh% P Sh% P 5 Sh% P 10 Sh% P Sh% P
5 10 20 25 5 10 20 25 20 25
BASIC 0.028⁄⁄ 0.025⁄⁄ 0.007 0.027 0.016⁄⁄⁄ 0.013⁄⁄⁄ 0.007 0.011 0.026⁄⁄ 0.023⁄⁄ 0.019 0.018
(2.13) (2.05) (0.20) (0.87) (3.70) (3.37) (0.60) (1.29) (2.27) (2.26) (0.83) (0.46)
Leverage 0.082 0.070 0.018 0.000 0.028 0.027 0.060 0.050 0.259⁄⁄⁄ 0.221⁄⁄⁄ 0.212 0.125
(1.13) (0.97) (0.06) (0.00) (1.08) (1.15) (0.75) (0.87) (2.73) (2.59) (1.16) (0.27)
FCF 0.173⁄⁄ 0.200⁄⁄⁄ 3.520 2.941 0.234⁄⁄⁄ 0.235⁄⁄⁄ 0.922 0.617 0.557⁄⁄⁄ 0.527⁄⁄⁄ 1.939 4.945
(2.39) (2.72) (1.31) (1.28) (6.01) (6.28) (1.09) (0.95) (5.68) (5.34) (1.06) (1.09)
Capexd 0.378⁄⁄⁄ 0.404⁄⁄⁄ 1.359⁄ 1.598⁄⁄ 0.087⁄ 0.082⁄ 0.409⁄ 0.388⁄ 0.047 0.089 0.829⁄ 2.315
(2.87) (2.86) (1.86) (1.97) (1.84) (1.89) (1.80) (1.72) (0.36) (0.74) (1.70) (1.33)
SGR 0.004 0.005 0.189 0.161 0.012⁄⁄⁄ 0.015⁄⁄⁄ 0.061 0.042 0.018⁄ 0.021⁄⁄ 0.120 0.262
(0.35) (0.44) (1.47) (1.48) (2.84) (3.34) (1.53) (1.42) (1.84) (2.15) (1.43) (1.19)
TO 0.274 0.339 0.380 0.907 0.081 0.078 0.150 0.404 0.526 0.122 0.080 2.469
(0.92) (1.03) (0.27) (0.55) (0.34) (0.31) (0.23) (0.81) (1.06) (0.24) (0.06) (0.87)
MTBV 0.083⁄⁄⁄ 0.085⁄⁄⁄ 0.108⁄⁄⁄ 0.094⁄⁄⁄ 0.002 0.003 0.009 0.005 0.014 0.012 0.019 0.014
(9.28) (8.97) (3.93) (4.64) (0.75) (1.12) (1.14) (0.83) (1.14) (0.95) (0.94) (0.43)
Country Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Industry Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Year Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
cons 0.100 0.075 0.866 0.533 0.034 0.001 0.250 0.145 0.359⁄ 0.375⁄⁄ 0.678 0.019
(0.41) (0.29) (1.06) (0.85) (0.50) (0.02) (0.96) (0.86) (1.84) (2.07) (1.27) (0.02)
Wald_chi2 413.557 418.947 49.502 55.625 375.319 394.023 62.010 67.405 262.425 312.846 60.146 16.075
pv_Chi2 (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

Governance measure is represented by the BASIC score. The dependent variable is the firm performance, which is denoted by Tobin-Q and ROA. Tobin-Q is
calculated as the natural logarithm of the book value of total assets minus the book value of total equity plus the market value of equity divided the book
value of total assets. The Return on Assets (ROA) is calculated as the natural logarithm of the Net Income divided by the book value of total Assets. The
Return on Equity (ROE) is calculated as the natural logarithm of the Net Income divided by book value of Equity. The explanatory variables are sales growth
rate (SGR), Market to Book value of equity (MTBV), Leverage and is calculated as Net Debt scaled by book value of assets whereby Net Debt is calculated as
Total Debt minus Cash and Marketable securities, free cash flow scaled by total assets (FCF), capital expenditure scaled by total assets (Capexd), and shares
turnover (to) measured as the natural logarithm of the total number of traded shares divided by the number of shares outstanding. Sh% P represents the
least holding percentages. All variables are winsorized at the 1% level, and Z statistics are reported in parentheses. ⁄⁄⁄, ⁄⁄, ⁄ Denote significance at the 1%, 5%
and 10% levels, respectively.

4.2.3. Impact of the ownership types

The effect of the type of ownership on the relationship between governance and performance is also another interesting
dimension that has not been given enough attention in previous research. Table 7 presents the results of Eq. (1) but for each
type of ownership. The three performance measures used: Tobin-Q, ROA and ROE provide strong evidence of the positive
association between the performance of the GCC listed firms and their levels of corporate governance for three types of
majority shareholders; these are CORPORATE, GOVERNMENT and FOREIGN, while good governance does not appear to lead
to better performance when a private (individual) investor is the major shareholder. Moreover, Table 7 indicates that this
relationship is at its strongest level when the major shareholder is GOVERNMENT, providing supporting evidence on the
importance of corporate governance for GCC governments. Our results for the effects of government on firm performance
is inconsistent with Brouthers et al. (2007) and Wei (2007), who find that government ownership negatively affect the per-
formance of firm, especially when the ownership percentage is very high and more than 50%. Such inconsistent result can be
related to differences in corporate governance across countries, where country characteristics influence the practice and
ranking of corporate governance scores in these countries (Doidge et al., 2007). In the GCC region we may compare our find-
ings to Arouri et al. (2014) who report positive impact of family, foreign, and institutional ownership on bank performance,
but no impact of government ownership on performance for 58 banks operating in the GCC markets. Again this partial con-
sistency with their results could be explained by the difference in sample period and characteristics as they focus only on 58
banks while our study uses the whole universe of publicly listed firms in the GCC region. However, our results are consistent
with Zeitun (2014) who find that Government ownership positively affects corporate performance in the GCC region. They
are also consistent with those of (Ang and Ding, 2006) who document that GLCs (Government Linked Companies) in Singa-
pore have higher valuations and have better corporate governance than a control group of non-GLCs. They are also in line
with findings reported in other studies focusing on the Asian market such as Hess et al. (2010) and Yu (2013) who document
a U-shaped relationship between State ownership and firm performance for Chinese firms. Therefore, it can be argued as well
that GCC governments are investing heavily to develop their capital markets, and to meet international best practices of cor-
porate governance in order to attract more foreign direct investment. Accordingly, it is in the best interest of GCC govern-
ments to improve the performance of the state-owned firms to show their commitment to improving the governance
system across the GCC countries. Furthermore, our results for foreign ownership are in line with Jeon et al. (2011) who find
evidence of the monitoring role of foreign investors who are mostly institutional investors at the same time.
 110
Table 7
Instrumental variables (GMM) regression with robust standard error and firm cluster, by ownership type.

Dependent Tobin-Q ROA ROE

A.A.-N. Abdallah, A.K. Ismail / J. Int. Financ. Markets Inst. Money 46 (2017) 98–115
Model (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Share type Corporate Government Private Foreign Corporate Government Private Foreign Corporate Government Private Foreign
BASIC 0.020⁄⁄ 0.032⁄⁄ 0.049 0.016⁄⁄ 0.019⁄⁄⁄ 0.028⁄⁄ 0.053 0.015⁄⁄⁄ 0.046⁄⁄⁄ 0.142⁄⁄ 0.070 0.052⁄⁄⁄
(2.25) (2.55) (1.03) (2.31) (5.01) (2.24) (0.67) (2.78) (5.36) (2.52) (0.77) (3.10)
Leverage 0.048 0.118 0.036 0.166 0.053⁄ 0.048 0.334 0.068 0.248⁄⁄⁄ 0.456⁄⁄⁄ 0.617 0.230
(0.70) (1.36) (0.15) (1.58) (1.82) (1.20) (1.13) (1.51) (2.69) (2.68) (1.38) (1.53)
FCF 0.277⁄⁄⁄ 0.427⁄⁄ 0.026 0.197 0.225⁄⁄⁄ 0.251⁄⁄⁄ 0.400 0.118⁄ 0.501⁄⁄⁄ 0.611⁄ 0.597⁄ 0.107
(3.90) (2.40) (0.15) (1.42) (5.88) (3.30) (1.37) (1.88) (4.88) (1.83) (1.71) (0.62)
Capexd 0.303⁄⁄ 0.058 0.598⁄⁄⁄ 0.444 0.107⁄⁄ 0.063 0.040 0.245⁄ 0.154 0.250 0.102 0.828⁄⁄
(2.16) (0.33) (2.74) (1.11) (2.20) (0.90) (0.16) (1.82) (1.05) (1.19) (0.24) (2.20)
SGR 0.004 0.013 0.024 0.006 0.004 0.014⁄ 0.006 0.013⁄ 0.008 0.032 0.016 0.040⁄
(0.44) (1.19) (1.02) (0.47) (0.94) (1.84) (0.22) (1.83) (0.76) (1.61) (0.39) (1.79)
TO 0.031 0.980 0.209 0.002 0.245 0.231 0.175 0.147 0.784 1.921 0.277 0.694
(0.09) (1.02) (0.28) (0.00) (1.45) (0.40) (0.51) (0.46) (1.64) (1.02) (0.38) (0.68)
MTB 0.076⁄⁄⁄ 0.103⁄⁄⁄ 0.070⁄⁄⁄ 0.068⁄⁄⁄ 0.003 0.009 0.035 0.007 0.016 0.048 0.066 0.006
Country Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Industry Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Year Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
_cons 0.488⁄⁄⁄ 0.645 0.139 1.126⁄⁄⁄ 0.009 0.095 0.803 0.074 0.096 0.401 1.474 0.271
(2.90) (0.82) (0.23) (4.20) (0.21) (0.31) (0.93) (0.94) (0.64) (0.41) (1.29) (1.09)
Wald_chi2 427.543 122.463 311.635 213.935 260.203 181.859 94.266 101.585 152.223 58.840 28.552 82.468
pv_chi2 (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

Governance measure is represented by the BASIC score. The dependent variable is the firm performance, which is denoted by Tobin-Q and ROA. Tobin-Q is calculated as the natural logarithm of the book value of
total assets minus the book value of total equity plus the market value of equity divided the book value of total assets. The Return on Assets (ROA) is calculated as the natural logarithm of the Net Income divided
by the book value of total Assets. The Return on Equity (ROE) is calculated as the natural logarithm of the Net Income divided by book value of Equity. The explanatory variables are sales growth rate (SGR), Market
to Book value of equity (MTBV), Leverage and is calculated as Net Debt scaled by book value of assets whereby Net Debt is calculated as Total Debt minus Cash and Marketable securities, free cash flow scaled by
total assets (FCF), capital expenditure scaled by total assets (Capexd), and shares turnover (to) measured as the natural logarithm of the total number of traded shares divided by the number of shares outstanding.
All variables are winsorized at the 1% level, and Z statistics are reported in parentheses. ⁄⁄⁄, ⁄⁄, ⁄ Denote significance at the 1%, 5% and 10% levels, respectively.
 A.A.-N. Abdallah, A.K. Ismail / J. Int. Financ. Markets Inst. Money 46 (2017) 98–115 111

All in all, when considering the results of Table 6 which show that there is no relationship between governance quality
and firm performance at high levels of concentrated ownership, someone may, erroneously, interpret this result as an indi-
cation that the government and local firms as major shareholders within a highly concentrated shareholder base do not
appear to have a mitigating role towards the agency problem. However, when these results are also examined together with
those in Table 7 which show that the positive relationship between governance quality and firm performance is not main-
tained for wealthy families (Private owners) as major shareholders, we may simply deduce that the wealthy families as
major shareholders within a highly concentrated shareholder base do not appear to have a mitigating role towards the
agency problem. Finally, this presumption is also consistent with the findings of the Pearl Initiative and PWC (2012) that
corporate governance is a lower strategic priority at present for family businesses.

4.2.4. Further robustness checks

We conduct further robustness checks in order to insure that the previous findings are free of any model specification
errors, and for this reason, in addition to our GMM fixed-effects regressions we control for further country time variant fac-
tors such as the GDP growth rate, the level of Foreign Direct Investment (FDI), in addition to other country level factors
obtained from the website of the World Bank and these include Gov_Effect (Government Effectiveness) and Reg_Quality
(quality of regulation) (see e.g. Low et al., 2012). We replicate the analysis of Tables 5–7, however in order to conserve space
we only report the results reproducing Table 6 and we report them in Appendix B.17 All in all, our conclusions are unaltered
and our earlier results of Tables 5–7 are robust.
We also use pooled regression with country and industry fixed-effects and we found similar results.

5. Conclusion, limitations and implications

5.1. Conclusions

Unlike previous studies that explore the relationship between firm performance and either governance or ownership con-
centration only, we investigate the relationship between performance and governance subject to different levels of owner-
ship concentration, and also to different types of majority shareholders. Our study falls in the category of research that
suggest that effective corporate governance depends on ‘‘the alignment of interdependent organizational and environmental
characteristics” (e.g., Aguilera et al., 2008; Aguilera and Desender, 2012; Filatotchev et al., 2006). In other words, in this paper
we provide support for the view that the effectiveness of corporate governance mechanisms must be considered conditional
on the ownership structure of the firm.
We initially provide evidence, in line with previous studies, that the level of corporate governance is positively related to
firm’s performance. More interestingly, we find that such a relationship holds, and in a decreasing magnitude, as the level of
ownership concentration increases from 5% to 10%; however, for high ownership concentration levels (20% or higher) we do
not find a significant association between corporate governance and performance. More specifically, our results present evi-
dence in support of the value relevance of dispersed ownership, instead, and provide new evidence on the relation between
good governance and performance, and simply imply that the value addition of good governance is not necessarily main-
tained at high levels of ownership concentration. These results support the view of Young et al. (2008) whereby under
Principal-Principal conflict increasing ownership concentration cannot be a remedy and may make things worse (Faccio
et al., 2001) or render the performance of the firm inefficient (Goergen, 2014).
Furthermore, we document that the positive effects of corporate governance on performance is the highest when the
majority shareholders are the government or local corporations. Our results are consistent with previous findings in Asia
such as, Ang and Ding (2006) who document that GLCs (Government Linked Companies) in Singapore have higher valuations
and have better corporate governance than a control group of non-GLCs. They are also in line with findings reported in other
studies focusing on the Asian market such as Hess et al. (2010) and Yu (2013) who document a U-shaped relationship
between State ownership and firm performance for Chinese firms. These results may stem from the benefits of government
support and political connections which could prove to be helpful in bad market conditions as well.

5.2. Implications

This paper has several important implications. Firstly, our findings add significant evidence to the existing literature as
they expand our understanding about the important role that the dispersed ownership and the types of majority
shareholders/block-holders play in strengthening the value-added function of good corporate governance practices. These
results are very important for companies’ shareholders, management, foreign investors, regulators, and academics to help
enhance stock markets development through improving best practices and hence helping to reach an optimal corporate
ownership structure that fits the corporate governance model in the region. Hence, the results may offer recommendations
to policy makers suggesting the inclusion of minimum ownership dispersion for publicly listed companies to ensure normal
trading in the stocks of these companies.

17
Results replicating Tables 5 and 7 are also available upon request.
112 A.A.-N. Abdallah, A.K. Ismail / J. Int. Financ. Markets Inst. Money 46 (2017) 98–115

Thirdly, unlocking facts relating to the practice of businesses in a region that is characterized by a secretive culture and
reluctance to disclose information (Kamla and Roberts, 2010), and dominated by family businesses, is vital to many Inter-
national organizations (e.g., OECD, IFC), regulators, government bodies, and standards setters. The results signal to those par-
ties the importance of continuing their efforts in reforming and promoting investor protection, transparency and disclosure
measures in order to improve the efficiency of financial markets and enhance investor confidence. In a survey about corpo-
rate governance enforcement in the MENA region, Middle East and North African Countries, Amico (2014), highlights the fact
that better corporate governance enforcement has emerged in the region, particularly, in the past three years in response to
political changes, change in government priorities and policy challenge, and to calls for meeting international best practices
of corporate governance. Our paper provides the first evidence that such efforts of GCC governments and other corporate
governance bodies in spreading corporate governance awareness are paying off.

5.3. Limitations and future research

Because no research is close to perfection, we believe that some limitations exist and these could pave the way for further
research over time. For instance, GCC stock markets are still underdeveloped and trading, especially, by individual investors
is not always driven by fundamental data but rather by emotional factors. Therefore, one possible limitation of our study is
the inability to control for behavioral factors due to the unavailability of such data for the GCC firms. Collecting data related
to investor or market sentiment in the GCC region is a challenging and time consuming task which may jeopardize the timely
progress of any research. Hence, future research may seek uncovering new results pertaining to the impact of investor sen-
timent on the relation between ownership structure and performance. Furthermore, other future research may shed lights
on other developing economies with similar institutional characteristics and ownership structure. Such research may inves-
tigate and verify the existence of a mechanism creating a negative relation between government and local firm shareholding
and financial performance which refutes the basic assumption of the agency theory and the mitigating role of large share-
holders. Additional future research may also include reinvestigating the relation between governance and corporate perfor-
mance in developed markets after accounting for the role of ownership structure. In other words, based on the notion that
‘‘one size does not fit all”, researchers may examine how adopting certain governance mechanisms maybe preferred over
others by corporations with dissimilar ownership structure, and hence examine their impact on corporate performance.

Appendix A. BASIC score composition

BASIC is made up of 43 parameters across 3 categories; these are: Trading History, Corporate Communications and Dis-
closure. Below we state the parameters within each category.

A. Trading history: Trading history is an evaluation of volatility, length of trading history, liquidity and shareholding
structure. This category consists of Nine measures:

1. Stock volatility
2. Market volatility
3. Trading history
4. Trading frequency
5. Average daily turnover
6. Bid/ask spread
7. Number of shareholders
8. Possibility of foreign ownership
9. Proportion of foreign ownership

B. Corporate communication: The corporate communication score assesses the extent to which a company communi-
cates with its shareholders and the broader market. It contains Nine measures as well

1. History of publicly available accounts

2. Availability of a corporate website
3. Availability of the latest annual report on the website
4. Availability of Investor Relations contact detail
5. Pre-announcement of results publication date
6. Holding of analyst meetings/conference calls
7. AGM pre-announcement date
8. AGM’s notice period in days
9. EPS calculation
 A.A.-N. Abdallah, A.K. Ismail / J. Int. Financ. Markets Inst. Money 46 (2017) 98–115 113

C. Disclosure: The disclosure score evaluates access to, and quality of, public corporate information and it consists of
twenty-five measures
1. Disclosure of number of shareholders
2. Disclosure of whether or not foreign ownership allowed
3. Disclosure of percentage foreign ownership allowed
4. Disclosure available in English
5. Disclosure typed
6. Disclosure in non-alterable format
7. Complete interim results disclosure
8. Annual report items: In addition to the seven disclosure items above, the annual reports of 581 companies have
been screened for the presence of the following information.

a. Management/chairman’s report.
b. Financial performance summary
c. Summary of operations
d. Corporate governance policies
e. Board sub-committees
f. Director independence
g. Executive/non-executive directors
h. Management profiles
i. Board member profiles
j. Revenue breakdown by geography
k. Revenue breakdown by business line
l. Directors’ shareholdings
m. Shareholders holding P 5% of total shares
n. Pre-emptive rights policy
o. Proxy voting policy
p. Cumulative voting policy
q. Disclosure of accounting policy
r. Auditor’s approval

Table 8
Table 6 replicated for robustness tests using country variant factors and governance data from the World Bank.

Dependent Tobin-Q ROA ROE

Model (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Sh% P Sh% P Sh% P Sh% P Sh% P 5 Sh% P Sh% P Sh% P Sh% P Sh% P Sh% P Sh% P
5 10 20 25 10 20 25 5 10 20 25
BASIC 0.026⁄⁄ 0.024⁄⁄ 0.014 0.041 0.016⁄⁄⁄ 0.011⁄⁄ 0.004 0.011 0.033⁄⁄⁄ 0.026⁄⁄ 0.025 0.017
(2.15) (2.01) (0.21) (0.87) (2.58) (2.32) (0.43) (1.07) (2.64) (2.25) (0.92) (0.18)
Leverage 0.127 0.093 0.517 0.141 0.002 0.017 0.005 0.022 0.175⁄ 0.173⁄⁄ 0.136 0.248
(1.34) (1.01) (0.66) (0.45) (0.06) (0.66) (0.04) (0.31) (1.86) (1.97) (0.33) (0.31)
FCF 0.127 0.164⁄ 5.574 2.727 0.182⁄⁄⁄ 0.200⁄⁄⁄ 0.715 0.546 0.449⁄⁄⁄ 0.469⁄⁄⁄ 2.551 5.315
(1.36) (1.86) (0.96) (0.92) (4.12) (4.94) (0.76) (0.81) (4.50) (4.73) (0.79) (0.54)
Capexd 0.461⁄⁄⁄ 0.457⁄⁄⁄ 1.935 1.598 0.131⁄⁄ 0.116⁄⁄ 0.337 0.359 0.131 0.134 0.986 2.319
(2.91) (2.85) (1.17) (1.38) (2.42) (2.40) (1.33) (1.46) (1.00) (1.13) (1.11) (0.64)
SGR 0.005 0.004 0.278 0.151 0.012⁄⁄⁄ 0.014⁄⁄⁄ 0.051 0.039 0.020⁄⁄ 0.022⁄⁄ 0.146 0.276
(0.50) (0.37) (1.05) (1.16) (2.71) (3.15) (1.18) (1.26) (2.11) (2.35) (0.99) (0.58)
TO 0.286 0.352 0.094 0.994 0.025 0.139 0.085 0.437 0.380 0.014 0.300 2.700
(0.86) (1.06) (0.04) (0.58) (0.10) (0.56) (0.14) (0.92) (0.78) (0.03) (0.19) (0.74)
MTBV 0.090⁄⁄⁄ 0.090⁄⁄⁄ 0.109⁄⁄ 0.097⁄⁄⁄ 0.002 0.000 0.005 0.004 0.009 0.013 0.012 0.017
(8.47) (8.22) (2.38) (3.87) (0.62) (0.13) (0.77) (0.65) (0.76) (1.10) (0.55) (0.36)
GDP_Growth 0.002 0.002 0.002 0.002 0.002⁄⁄⁄ 0.001⁄⁄ 0.001 0.001 0.004⁄⁄⁄ 0.003⁄⁄⁄ 0.002 0.001
(1.52) (1.47) (0.44) (0.51) (2.92) (2.56) (1.11) (1.52) (2.79) (2.58) (0.71) (0.08)
Government 0.002 0.002 0.006 0.005 0.001 0.000 0.000 0.001 0.002 0.001 0.004 0.001
Effectiveness
(1.28) (1.13) (0.66) (0.73) (1.35) (0.57) (0.22) (0.40) (1.47) (1.00) (0.85) (0.08)
Regulatory Quality 0.001 0.001 0.003 0.001 0.001 0.001 0.002 0.001 0.000 0.000 0.003 0.005
(0.51) (0.26) (0.42) (0.10) (1.15) (1.42) (1.38) (0.60) (0.11) (0.14) (0.79) (0.30)
Country/Industry/ Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Year
_cons 0.299 0.196 0.742 0.479 0.275⁄⁄ 0.149 0.040 0.060 0.113 0.071 0.595 0.660
(0.83) (0.51) (0.37) (0.39) (2.22) (1.31) (0.12) (0.19) (0.40) (0.26) (0.56) (0.29)
chi2 406.081 419.952 22.933 51.985 383.252 426.001 89.297 75.562 301.722 348.308 48.253 12.011
pv_chi2 (0.000) (0.000) (0.852) (0.011) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.025) (0.999)
114 A.A.-N. Abdallah, A.K. Ismail / J. Int. Financ. Markets Inst. Money 46 (2017) 98–115

Appendix B

See Table 8.

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