Agency Costs, Ownership Structure and Dividend Policy in Saudi Listed Firms: A Simultaneous Equations Approach

Abstract

<p>This dissertation addresses the simultaneous relationship between agency costs, ownership structure and dividend policy in the listed corporate firms in Saudi Arabia - the largest emerging economy in the Middle East. Specifically, the study aims to investigate co-deterministic relations between: (i) agency costs and ownership structure, (ii) agency costs and dividend policy, and (iii) ownership structure and dividend policy. Extant literature generally concludes that both ownership structure and dividend policy can effectively mitigate agency costs in emerging economies; however, these simultaneous relationships have never been researched in the Saudi context, except for a handful of studies examining the relationship between ownership structure and dividend policy. Building on relevant theories and using data from the Saudi Stock Exchange (Tadawul) for the 2010 to 2015 period, this study explores the nature of the simultaneous relationship between agency costs, ownership structure and dividend policy in the Saudi market. Advanced econometric methods (two-stage least squares [2SLS] and system generalised method of moments [GMM]) are applied to analyse the data and produce credible findings from the study.</p> <p>The 2SLS and system GMM findings on the bi-directional relationship between agency costs, ownership structure and dividend policy reveal a significantly negative simultaneous relationship between agency costs and ownership structure, and between agency costs and dividend policy. However, a simultaneous relationship is not evident between ownership structure and dividend policy, indicating a unidirectional relationship running from ownership structure to dividend policy. In addition, a number of other governance variables demonstrate expected findings with agency costs, dividend policy and ownership structure. These findings of this study from Saudi Arabia have similarities with those reported in previous studies in developed economies, despite the institutional and socio-economic/cultural differences between them. Further, these findings align with the theoretical underpinning in the literature relevant to emerging markets.</p> <p>The empirical findings of this study provide support for the new corporate governance regime in Saudi Arabia, encouraging good corporate governance practices in Saudi firms to alleviate the level of agency costs for sustained growth. In an emerging market context and as a pioneer of this type of study in Saudi Arabia, the current study extends the existing literature in identifying effective corporate governance mechanisms and their two-way interactions with agency costs, as compatible with developed economies. These findings will be beneficial to policy makers, market authorities, investors and other stakeholders to evaluate, sustain and improve the current corporate governance practices in Saudi listed firms.</p>