Corporate governance and firm valuation in emerging markets: evidence from UAE listed companies in the Middle East

Abstract

There has been previous empirical research on corporate governance and board of directors which focused on attempting to find a direct relationship between internal governance variables and firm valuation. It has however also been argued that there are differences in the nature, direction, magnitude and processes of operation of this relationship between developed and developing financial markets because of differences in their respective economic, social, regulatory framework and market behaviour . This study examines this relationship in the context of the United Arab Emirates (UAE) as one of the emerging markets in order to extend evidence further beyond the western developed capital markets into the Middle East. Does the prevalence of family-ownership in the UAE for example matter to the company valuation? What about the presence of institutional ownership or ownership concentration? And do the corporate communication and disclosure scores published by the UAE Institutional Investor in cooperation with Hawkamah, The Institute for Corporate Governance; have any relationship to corporate valuation? More specifically this study, using multiple regression analysis, examines the impact of firm level internal corporate governance indicators namely board structure, ownership structure, and transparency and disclosure governance practices on the valuation of listed companies in the UAE after controlling for company size, industry, leverage, and dividend payout using Tobin’s Q, Price - Earning Ratio (PER) and Price - Book Value Ratio (PBVR) as surrogates for company valuation. The results show no significant relationship between internal corporate governance indicators and company valuation when using Tobin’s Q and PBR as measures of company valuation. However they reveal statistically significant links between some of the internal corporate governance indicators on the one hand and company market valuation on the other when company valuation is measured by the price earnings ratio (PER) which is one of the most common and important stock market indicators for investors. These results suggest that the company valuation measures like the price earnings ratio which explicitly reflects the financial markets assessment of the firm investment and dividend policies lead to a better correlation with internal corporate governance indicators. Moreover, the regression results indicate that the frequency of board meetings, adoption of best transparency practices and the presence of private institutional investors such as sovereign wealth funds are the most significant internal corporate governance variables in accounting for differences in company market values in the UAE. The structural aspects of the board such as size and composition turned out not to be statistically significant in their impact on company valuation.

Corporate Governance and Company Value: A Manufacturing Industry Case Study

“…In the model studied, the size of the board of directors and the size of the audit committee were found to not affect firm value, so that H3 dan H5 was rejected. This result is in line with (Adawi & Rwegasira, 2013;Bhat et al, 2018) where changes in the size of the board of directors do not affect firm value. This demonstrates that increasing the number and size of the board of directors and audit committee will not solve the agency problem in the company and will have no impact on the value of the company.…”

“…In a study conducted (Kota & Tomar, 2010;Kumar & Singh, 2013;Mak & Kusnadi, 2005) board size was found to have a negative effect on firm value. Positive results were found in research (Buallay et al, 2017;Lidyah et al, 2019), in addition (Adawi & Rwegasira, 2013;Bhat et al, 2018) revealed that the size of the company's board does not affect firm value. Based on the description above, the third hypothesis developed is as follows: H3 : The size of the board of directors affects the value of the company…”

Influence of Transparency and Disclosures on the Dividend Distribution Decisions in the Firms: Do Profitability and Efficiency of Firms Matter?

“…(Dimitropoulos and Tsagkanos 2012) says that the quality of corporate governance leads to greater profitability and viability. Many studies have also evaluated the relationship between CG and (i) the overall success of companies (Korent et al 2014), (ii) transparency and financial disclosure (Mallin 2002), (iii) dividend policy (Garay and González 2008), (iv) risk profile/risk disclosure (Elshandidy and Neri 2015), (v) investor protection (Klapper and Love 2004), (vi) firm performance (Aebi et al 2012), (vii) valuation of a company (Adawi and Rwegasira 2013), and (viii) formation of a board-level technology committee (Premuroso and Bhattacharya 2007).…”

The Impact of Corporate Governance Practices on Corporate Financial Performance in Ethiopia

“…Board meetings are significantly and positively associated with company performance Adawi and Rwegasira [28] and Satirenjit, et al [25] specifically test the effects of board meeting on firm accounting performance they concluded that board diligence in terms of board meetings is found to have an adverse effect on firm performance. However contradictory findings Malik and Nehra [29] stated the more frequent the meetings, closer the supervision and control over managers, the more relevant would be the advisory role.…”