Study Sample and Selected Data

This study selected the final sample based on two criteria: (i) the firm’s annual reports have to be available for all seven years from 2004 to 2010, either in Tadawul’s website, the MCI’s archives, the firm’s website or national newspapers; (ii) the availability of firms’ financial statements and firms’ stock market information for the seven-year period. These important criteria were set for many reasons. First, the criteria helped to satisfy the requirements of balanced panel data analysis (Henry, 2008; Ntim et al., 2012a). Using balanced panel data has a number of advantages, including: (i) having both cross- sectional and time-series observations; (ii) improving degrees of freedom; (iii) minimising the effect of multicollinearity problems (Gujarati, 2003; Ntim et al., 2012a); (iv) helping ascertain whether cross-sectional association among corporate governance practices, voluntary governance disclosure and financial performance hold over time (Ntim et al., 2012b); and (v) helping minimise the potential endogeneity problems that may arise from potential unobserved firm-level heterogeneity (Henry, 2008; Guest, 2009; Ntim et al., 2012b).

Second, in line with Chen and Zhang (2014), the sample period spans both pre- and post-2006, the year in which the SCGC was released. This helps in assessing whether the introduction of the SCGC has helped in improving corporate governance standards in Saudi Arabia. Third, using cross-sectional and time-series data is consistent with the literature on corporate governance (e.g., Tsamenyi et al., 2007; Henry, 2008; Chalevas, 2011; Ntim et al., 2012a), which also facilitates comparison of the results with those of previous studies.

All Saudi listed firms’ annual reports became publicly accessible in 2004 after the establishment of the CMA. This allowed the researcher to collect data from 2004. Also, starting from 2004 helped the researcher in comparing the level of corporate governance compliance before and after the release of the 2006 Saudi governance code. The sample ends in 2010 because this is the most recent year for which data is available, as the data collection occurred between April 2011 and September 2011. Thus, the final sample consists of 80 out of 145 firms. The overall sample represents about 55% of all the Saudi firms listed on the Tadawul as of 31 December, 2010, and provides 560 firm-year observations from seven major industries.

Regarding the 65 excluded firms, as shown in Panel A of Table 5.1, two firms were suspended and another two firms were merged into one firm between 2006 and 2009. Of the remaining 61 excluded firms, the data for 34 firms was not available for all seven

years. The remaining 27 firms were listed between 2009 and 2010, with insufficient data. Details of the names and industries of the selected firms are provided in Appendix 1.

The sample size used in the present study is comparatively larger than those used in existing Saudi studies (e.g., Alsaeed, 2006; Hussainey and Al-Nodel, 2008; Al-Abbas, 2009; Al-Nodel and Hussainey, 2010; Al-Moataz and Hussainey, 2012; Al-Moataz and Lakhal, 2012; Al-Janadi et al., 2013). For instance, Alsaeed (2006) investigates the level of compliance with corporate governance principles using a sample of 40 firms in 2003 (i.e., 40 firm-year observations). Similarly, Hussainey and Al-Nodel (2008) use one-year cross- sectional data consisting of 64 observations, and examine the extent to which Saudi listed firms disclose information online. Similar to these studies, Al-Nodel and Hussainey (2010) use a very small sample of 37 firms in 2005 to investigate the association between corporate governance and financial performance. Al-Moataz and Hussainey (2012) and Al- Moataz and Lakhal (2012) use the same data for about 50 listed firms over two years. Al- Abbas (2009) and Al-Janadi et al. (2013) employ samples consisting of 78 and 87 observations, respectively. Consequently, the sample size used in this study is another improvement on previous Saudi studies.

In addition, the study includes size variables to classify firms as large, medium or small. This is unlike prior studies, which focus on only a few firms. Eisenberg et al. (1998) argue that analysing one size alone can impair the generalisability of the research findings. The literature on corporate governance provides reasons why firm size might be an important factor in voluntary corporate governance disclosure: (i) the cost of compliance, which is more likely to be higher for small firms than large firms (MacNeil and Li, 2006); (ii) large firms have multiple lines of operations and activities, which inherently leads to greater disclosure (Jensen and Meckling, 1976; Eng and Mak, 2003); and (iii) large firms have more complex capital structure, and thus are more likely to need to engage in high levels of voluntary corporate governance disclosure in order to reduce information asymmetry (Haniffa and Cooke, 2002).

5.2 THE QUANTITATIVE RESEARCH METHODOLOGY

This section discusses the quantitative research methodology used to answer the third, fourth and fifth research sub-questions, including: (i) What are the factors that influence the level of compliance with the 2006 Saudi Corporate Governance Code (SCGC)?; (ii) What is the association between individual corporate governance mechanisms and firm financial performance?; and (iii) What is the relationship between

compliance with the 2006 SCGC and firm financial performance? In particular, it discusses the three main models examining the relationship among corporate governance mechanisms, voluntary corporate governance disclosure and financial performance. The remaining sections of the chapter are organised as follows. Section 5.3 investigates the voluntary corporate governance disclosure model, which analyses the relationship between corporate governance mechanisms and voluntary corporate governance disclosure. Section 5.4 presents the models that examine the association between corporate governance mechanisms and firm financial performance. Two main corporate governance models are employed for this particular relationship, the equilibrium-variable model, in Subsection 5.4.1, and the compliance-index model, in Subsection 5.4.2.

5.3 THE VOLUNTARY CORPORATE GOVERNANCE DISCLOSURE

MODEL

This model seeks to examine the determinants of voluntary corporate governance disclosure in Saudi listed firms. Table 5.2 contains a summary of variables used in this model, while the following three subsections discuss the regression model. Specifically, Subsection 5.3.1 explains the dependent variable: the Saudi Corporate Governance Index (SCGI). Subsection 5.3.2 presents the explanatory variables, while Subsection 5.3.3 discusses the control variables.

Table 5.2: Summary of variables used for the voluntary corporate governance disclosure model

Dependent variables

SCGI Corporate governance (CG) compliance and disclosure index consisting of 65 provisions from the SCGC, which take a value of 1 if each corporate governance provision is disclosed, and 0 otherwise; scaled to have a value between 0% and 100%.

Independent Variables

INDD% Percentage of independent director members on the board of directors. BSZ The number of board members at the end of the financial year.

AFZ 1, if a firm is audited by a big-four audit firm (PricewaterhouseCoopers, Deloitte & Touche, Ernst & Young and KPMG), and 0 otherwise.

CGC 1, if a firm has set up a corporate governance committee, and 0 otherwise. GONR% Percentage of shares held by government shareholders.

IONR% Percentage of shares held by institutional shareholders.

BONR% Percentage of shares held by shareholders with at least 5% of the total company shareholdings.

DONR% Percentage of shares held by director shareholders. Control Variables

FSZ Natural log of the book value of a firm’s assets.

SGR% Current year’s sales minus last year’s sales to last year’s sales. LVG% Ratio of total debt to total assets.

CEXC% Percentage of total capital expenditure to total assets.

DV 1, if a firm paid dividends during the financial year, and 0 otherwise.

INDU A dummy variable for each industry on the stock market (classified to seven industries). YDU A dummy variable for each year of the sample period (seven years) from 2004 to 2010,

5.3.1 The Dependent Variable: The Saudi Corporate Governance Index (SCGI)