Corporate Governance and Financial Policies of Family Businesses Listed on the Saudi Stock Exchange (Tadawul)

Abstract

<p>The main aim of this study is to investigate the relationship between family ownership, characteristics of board of directors and both the dividend policy and capital structure in the Saudi context. Saudi Arabia is a member of the G20 group and one of the leading countries in the Middle East and among developing states. It is distinguished by different economic and financial systems to more advanced and developed countries. In addition, the Saudi Arabian economy is largely characterised by family-owned businesses. Furthermore, the ownership structure of the listed Saudi Arabian companies is dominated by families. However, little research has been conducted to examine the association between family ownership, characteristics of board directors and both the dividend policy and capital structure in the Saudi setting. Therefore, it is vital to addressthe research gap in the existing literature review. Groups of theories and frameworks used in the current study include social emotional wealth theory, agency, stewardship, stakeholder theory, transaction cost and political theories. As a result of reviewing of these theories and findings, a range of hypotheses have been formulated. Additionally, the data were gathered from the Refinitiv Eikon and company annual reports of 88 non-financial firms listed on the Saudi Stock Exchange from 2010 to 2018, for a total of 787 observation year data sets. Panel regression procedures employed to analyse the data include random effects logistics, random effects tobit, panel correction standard error regressions and the generalised method moments estimator.</p> <p>The findings of this study have revealed that family, government and foreign ownership is positively and statistically significantly correlated with dividend policy. More specifically, the effect of family ownership appeared to have a significant positive relationship with dividend policy. In terms of the family involvement findings, CEO (chief executive officer) family appeared to have a significant negative relationship with dividend policy, showing the entrenchment effects. In term of board characteristics' findings from this study, board size and frequency of board meetings showed a positively and statistically significantly relationship with dividend policy. The results also show the positive effect of the Big-4 on dividend policy. On the other hand, a significant negative relationship was found between board independence and dividend policy in Saudi listed firms.</p> <p>With respect to the capital structure, the outcomes indicate a significant and negative effect of family ownership on capital structure. Similarly, managerial and foreign ownership have a significant and negative effect on capital structure measures. In contrast, the results found a significant and positive effect of government ownership on capital structure. The outcomes also show that the interaction between family ownership and managerial ownership negatively affects leverage ratio in Saudi firms. The results also reveal that CEO family is a statistically and significant negative factor associated with capital structure. The findings also show a significant positive relationship between CEO tenure and capital structure. In addition, the results reveal a significantly positive association between board size and total debt-to-equity. Furthermore, the findings found a positive relationship but an insignificant one between board independence and capital structure. The study reveals that the coefficient board meeting is negative related to capital structure. Finally, the findings also found that firms audited by Big4 auditors acquire less debt.</p>