Academic journal article Accounting & Taxation

Royal Family Members and Firm Performance: Evidence from Kingdom of Saudi Arabia

Academic journal article Accounting & Taxation

Royal Family Members and Firm Performance: Evidence from Kingdom of Saudi Arabia

Article excerpt

ABSTRACT

This study examines the relationship between Royal family members on the board of directors and firm performance of 573 publicly listed in the Saudi Stock Exchange (Tadawul) during 2007-2011 periods. This study utilizes two measurements of the firm performance: (1) Tobin's Q and (2) ROE. Using the WLS, the result of this study shows that the existence of Royal family members on the board of Saudi-listed companies is significantly associated with firm performance. This study provides evidence on the role played by Royal family members in reducing agency conflicts and information asymmetries in Saudi Arabia where firms may be influenced by the cultural issues related to political ties and family involvement. The result of this study contributes to the existing theory and empirical evidence of how Royal family members add value to the firm. It offers policy-makers additional evidence on the positive impact of Royal family members on firm performance.

JEL: M48

KEYWORDS: Tobin's Q, ROE, Royal Family Members on the Board, Saudi Arabia

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

The board of directors is assigned a number of key responsibilities and obligations, including establishing aims and goals, and overseeing and controlling the activities and operations of the organization, which is pivotal to the decision making process within the organization. In line with the agency theory, the key responsibilities of the board of directors are centered on management monitoring in increasing the value of the firms (Fama & Jensen, 1983).Moreover, a critical role is normally adopted by the board of directors with a focus directed towards protecting the shareholders' interests; thus, the controlling role is essential and therefore, needs to be followed by the service role. Despite the fact that the majority of management related decisions are assigned to managers, the board of directors is still considered as the main point of control through carrying out the ratification and monitoring of significant managerial decisions (Fama & Jensen, 1983). Accordingly, agency theory explains that the directors represent shareholders and the monitoring activities focus onto the decision making process in an attempt to circumvent issues between shareholders and management.

In order to improve the motivation of the board to supervise management, agency theory implies management ownership through aligning shareholder and manager interests, non-dual leadership and a higher proportion of external directors of the board in order to improve board independence (Muth & Donaldson, 1998). As advocated by the resource dependence theory, the main objective of an organization's board of directors is to act as a co-optation instrument for identifying access to external resources in order to achieve improvements in terms of business performance (Johnson, Daily & Ellstrand, 1996; Pfeffer, 1972, 1973). This theory further implies that the board's role needs to ensure involvement in corporate strategy (Zahra & Pearce, 1989); thus, the board is recognized as being a strategy formulation/implementation facilitator (Baysinger & Butler, 1985). Moreover, the theory postulates that directors who have a link with outsiders are more likely to achieve access to other sources and means (Muth & Donaldson, 1998). The board's characteristics and the firm's performance are increasingly subjected to ongoing review, especially when there is a major legislative change or when codes of best practice are proposed or issued. Cicero, Wintoki and Yang (2010) showed evidence that U.S firms allowed target board panel of changes to the board. They found that as the economic and contracting environment change, firms are relatively quick to adapt their boards in response to these changes. Their results strongly support the idea that board structure is considered important to firm value by all parties in the firm's nexus of contracts. …

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