The impact of corporate governance on major shareholdings : the case of Saudi Arabia

Abstract

The aim of this thesis is to examine whether the Corporate Governance (CG) structure in potential investee companies in Saudi Arabia has an impact on major shareholders choices of shares. Scholars argue that good CG practices provide investors with more confidence to invest their wealth in capital markets especially in developing countries (McKinsey, 2000). Saudi Arabia embraces unique cultural, economic, social, religious settings and is characterised with a prevalent presence of major shareholders in the capital market that is accompanied by allegedly weak legal settings, which was observed after the infamous collapse of the Saudi capital market in February 2006 (Ramady, 2010; Al-Nodel and Hussainey, 2010; Al-Matari, Al-Swidi and Fadzil, 2012). In order to investigate the impact of corporate governance on major shareholdings in the Saudi capital market, a full review of the CG evolution in Saudi Arabia is presented and two sets of questions are identified to achieve the objectives of this thesis. To address the research questions, this thesis employs triangulation (i.e., mixed methods, quantitative and qualitative) and embraces agency theory as main theoretical framework. The quantitative assessment is performed using a panel data analysis of 97 non-financial listed companies in the Saudi capital market over the period from 2013 to 2017 (485 observations). The qualitative assessment is performed by conducting semi-structured interviews with fifteen participants of different categories of major shareholders within the Saudi capital market. Overall, the regression analysis has shown that total major shareholdings have a significant negative relationship with CG score. Some interviewees expressed similar views toward such mechanisms as they are believed to be responsible for the limitation of their power over investee firms. The results of regression analysis to each category of major shareholders have revealed that the only categories that are significantly related to CG is wealthy families (negative) and wealthy individuals (positive), which is also supported by the findings of the qualitative assessment. The qualitative assessment of the rest of major shareholders categories have provided mixed results concerning CG preferences. Few interviewees believe that some parts of CG structure of investee firms play a role during the decision-making of their investments. On the other hand, most interviewees have revealed that CG in general is not taken into consideration when making investment decisions. This explains the insignificant relationship between CG and most categories of major shareholders revealed by the regression analysis.