CORPORATE GOVERNANCE STRUCTURE EFFICIENCY AND BANK

PERFORMANCE IN SAUDI ARABIA

by

Adel Hassan Al-Hussain

A Dissertation Presented in Partial Fulfillment

of the Requirements for the Degree

Doctor of Business Administration

UNIVERSITY OF PHOENIX

February 2009
 UMI Number: 3357430

INFORMATION TO USERS

The quality of this reproduction is dependent upon the quality of the copy
submitted. Broken or indistinct print, colored or poor quality illustrations and
photographs, print bleed-through, substandard margins, and improper
alignment can adversely affect reproduction.
In the unlikely event that the author did not send a complete manuscript
and there are missing pages, these will be noted. Also, if unauthorized
copyright material had to be removed, a note will indicate the deletion.

______________________________________________________________

UMI Microform 3357430

Copyright 2009 by ProQuest LLC
All rights reserved. This microform edition is protected against
unauthorized copying under Title 17, United States Code.
_______________________________________________________________

ProQuest LLC
789 East Eisenhower Parkway
P.O. Box 1346
Ann Arbor, MI 48106-1346
© 2009 by ADEL H. AL-HUSSAIN
ALL RIGHTS RESERVED
 ABSTRACT

The study of corporate governance structure in banking sector is an important component

within the enhancement of banks’ efficiency and performance. This current study

investigated relationships between the efficiency of corporate governance structure and

bank performance. The sample was comprised of nine listed banks in Saudi Stock

Exchange. The sample indicated an overall support that blockholders play an important

role in the enhancement of the efficiency of corporate governance structure of banks. The

results reflected that there was a strong relationship between the efficiency of corporate

governance structure and bank performance when using return on assets as a performance

measure with one exception that government and local ownership groups were not

significant. However, when using stock return as a performance measure, there was a

weak positive relationship between the efficiency of corporate governance structure and

bank performance.
 v

DEDICATION

This dissertation is dedicated to my family without whom I would not have

attempted and fulfilled this life changing endeavor. First to God, Allah, for strength

and assurance, second to the Prophet Mohammad and his Household, peace be upon

them, to my mother and my father, whose wisdom and encouragement kept me going,

to my wife whose constant love, devotion, and support is unwavering, to my daughters

sons, sisters, and brothers, who kept me motivated, to my best friends who supported me,

to my spiritual father, Dr. Abdul Hadi Al-Fadhli, and to Dr. Fazal Seyyed who shared

knowledge and encouraged me to complete this study. I love you all.

 vi

ACKNOWLEDGMENTS

I would like to acknowledge the following people for making a positive

difference in my educational journey. Words are inadequate to express my deepest

appreciation to my friends and family who shared my experiences in writing this

dissertation.

There would have been no piece of work without my dissertation mentor, Dr.

Robert Johnson. He provided understandings, encouragement, and support, both

academically and professionally, during the lengthy process of the research. Especially

during the final part of the writing process, his patience and guidance was very helpful in

facilitating the completion of the study. He never hesitated to put in extra work to make

me understand my committee’s instructions and concerns. He is a student-centered and I

am very fortunate to have him as my dissertation mentor.

I would like to thank Dr. Abdiweli Ali for agreeing to serve as a dissertation

committee member. The compassion, support, and understanding, which he provided,

developed a supportive learning environment to help finalize my research. In addition, I

would like to thank him for his guidance and professional assistance throughout this

process.

I would like also to thank Dr. Kathleen Dominick for her honest feedback and her

commitment to my learning. Her guidance and support was crucial to the completion of

my dissertation. Finally, I would like to thank Reuters and Bureau van Dijk for their

permission to access their databases, Reuters Knowledge and BANKSCOPE,

respectively.
vii
 viii

TABLE OF CONTENTS

LIST OF TABLES............................................................................................... xi 

LIST OF FIGURES ............................................................................................xii 

CHAPTER 1: INTRODUCTION ......................................................................... 1 

Background of the Problem .................................................................................. 2 

Statement of the Problem...................................................................................... 4 

Purpose of the Study ............................................................................................. 5 

Significance of the Study ...................................................................................... 6 

Nature of the Study ............................................................................................... 7 

Research Question ................................................................................................ 8 

Hypotheses............................................................................................................ 8 

Theoretical Framework......................................................................................... 9 

Definition of Terms............................................................................................. 10 

Assumptions........................................................................................................ 11 

Limitations .......................................................................................................... 11 

Delimitations....................................................................................................... 12 

Summary ............................................................................................................. 13 

CHAPTER 2: LITERATURE REVIEW ............................................................ 14 

Corporate Governance Concept.......................................................................... 17 

Sarbanes-Oxley Act ............................................................................................ 18 

Corporate Governance Principles ....................................................................... 19 

Saudi Corporate Governance Code..................................................................... 20 

Corporate Finance Theory .................................................................................. 21 

 ix

Agency Theory.................................................................................................... 23 

Conflict of Interests............................................................................................. 24 

Corporate Governance Structure and Corporate Performance ........................... 26 

Blockholder Ownership ...................................................................................... 27 

Capital Structure................................................................................................. 30 

Investment and Growth ....................................................................................... 31 

Summary ............................................................................................................. 31 

Conclusion .......................................................................................................... 32 

CHAPTER 3: METHOD .................................................................................... 34 

Research Design.................................................................................................. 35 

Governance Efficiency Scores by DEA.............................................................. 36 

Panel Regression................................................................................................. 40 

Variables ............................................................................................................. 40 

DEA variables.............................................................................................. 40 

Dependent and independent variables ......................................................... 41 

Appropriateness of Design.................................................................................. 41 

Research Question .............................................................................................. 42 

Hypotheses.......................................................................................................... 43 

Population and Sampling Frame......................................................................... 43 

Geographic Location........................................................................................... 44 

Data Collection ................................................................................................... 44 

Data Analysis ...................................................................................................... 46 

Summary ............................................................................................................. 48 

 x

CHAPTER 4: RESULTS.................................................................................... 50 

Data Collection Process ...................................................................................... 53 

Descriptive Sample Statistics.............................................................................. 54 

Results from DEA Analysis................................................................................ 56 

Regression Analysis............................................................................................ 59 

Summary ............................................................................................................. 70 

CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS...................... 72 

Interpretation of the Data Results ....................................................................... 73 

Inferences about the Important Findings ............................................................ 74 

Results of the Analysis to Leadership Implications............................................ 75 

Recommendations for Action by Stakeholders................................................... 78 

Recommendations for Future Research .............................................................. 80 

Summary ............................................................................................................. 80 

Conclusion .......................................................................................................... 81 

REFERENCES ................................................................................................... 83 

APPENDIX A: SIGNED INFORMED CONSENT: PERMISSION TO USE

PREMISES, NAME, AND/OR SUBJECTS OF FACILITY, ORGANIZATION,

UNIVERSITY INSTITUTION, OR ASSOCIATION ....................................... 98 

APPENDIX B: UNIVERSITY OF PHOENIX IRB APPROVAL................... 101 

 xi

LIST OF TABLES

Table 1 Summary of Statistics: Sample of Nine Banks, 2004-2007................... 55 

Table 2 Summary of Statistics: DEA Efficiency Scores for Nine Banks per

Ownership Group, 2004-2007 ............................................................................ 56 

Table 3 Summary of Statistics: DEA Efficiency Scores for Nine Banks per Year,

2004-2007 ........................................................................................................... 58 

Table 4 Panel Regression Estimates (Weighted Least Square Model) of Return

on Assets (ROA) .................................................................................................. 67 

Table 5 Pearson Correlation between Variables................................................ 68 

Table 6 Panel Regression Estimates (Weighted Least Square Model) of

STOCK_RETURN ............................................................................................... 69 

 xii

LIST OF FIGURES

Figure 1. Panel Data of Data Envelopment Analysis (DEA) ............................. 53 

Figure 2. Distribution of Efficiency Scores of FAMILY, GOVERNMENT,

LOCAL, and FOREIGNER Groups ................................................................... 57 

Figure 3. Distribution of Efficiency Scores of ALL_BLOCK from 2004 to 2007

............................................................................................................................. 60 

Figure 4. Panel Data of Regression .................................................................... 61 

Figure 5. Histogram and Normal Distribution Curve of ALL_BLOCK

Efficiency Scores ................................................................................................ 62 

Figure 6. Histogram and Normal Distribution Curve of FAMILY Efficiency

Scores.................................................................................................................. 62 

Figure 7. Histogram and Normal Distribution Curve of GOVERNMENT

Efficiency Scores ................................................................................................ 63 

Figure 8. Histogram and Normal Distribution Curve of LOCAL Efficiency

Scores.................................................................................................................. 63 

Figure 9. Histogram and Normal Distribution Curve of FOREIGNER Efficiency

Scores.................................................................................................................. 64 

Figure 10. Histogram and Normal Distribution Curve of Bank Size ................. 64 

Figure 11. Histogram and Normal Distribution Curve of Return on Assets ...... 65 

Figure 12. Histogram and Normal Distribution Curve of STOCK_RETURN .. 65 

 1

CHAPTER 1: INTRODUCTION

At the end of 2007, market capitalization of the listed commercial banks in Saudi

Arabia constituted about 29.97% of the Tadawul All Share Index (TASI) of the Saudi

Stock Exchange. For details, see the official web site of the Saudi Stock Exchange

(Tadawul, 2007). This observation gives an indication that the commercial banks in Saudi

Arabia play an essential role in the economy of the country. Therefore, evaluating banks’

performance and monitoring their financial positions are important to many parties, such

as stockholders, potential investors, creditors, customers, employees, and regulators.

Having an appropriate measurement tool that can evaluate banks’ performance

would be advantageous. Traditionally, analysts often measure banks’ financial

performance and management quality based on financial ratios and stock price.

Traditional financial measures such as profitability, liquidity, and asset turnover are not

enough to evaluate banks’ performance. Nowadays, measuring bank efficiency and bank

performance has become complicated, especially in the presence of agency problems and

conflict of interests among stakeholders. A unique technique that can capture financial

and non-financial information to measure bank efficiency and bank performance is the

current need of this complicated environment.

In the current research, this researcher used a novel technique called Data

Envelopment Analysis (DEA). DEA is a non-parametric mathematical programming

methodology that can be used to evaluate the efficiency of a variety of organizations

using multiple inputs and multiple outputs (Yue, 1992). The DEA technique was initially

proposed by Charnes, Cooper, and Rhodes (1978). This methodology can measure the

efficiency of the corporate governance structure in an objective way. Berger and

 2

Humphrey (1997) and Bauer, Berger, Ferrier, and Humphrey (1998) argued that efficient

frontier approaches, such as the DEA model, seem to be superior compared to traditional

financial measures.

Background of the Problem

The core of the agency theory is how to resolve conflicts resulting from the

separation of ownership and management control of corporate resources (Fama & Jensen,

1983; Jensen, 1986). In the modern concept of the corporation, common stockholders

take little or no active participation in the management of the firm. Instead, stockholders

usually hire professional managers to operate the firm in a manner consistent with the

stockholders’ best interests. However, giving managers the control over the resources of

the firm gives them the opportunity to use the firm’s resources for their own interests,

regardless of the effect on the firm’s stockholders. For example, managers may travel via

the corporate jet, ask for private dining rooms, ask for special pension deals, and ask for

at-home security (Gunn, 2004).

The separation of the activities of ownership and management and the presence of

informational asymmetry may cause conflict of interests. The manager’s self-interest

could lead to the misuse of bank resources, for instance, through investing in risky and

imprudent projects at the expense of the stakeholders who provide capital (Jensen &

Meckling, 1976; Shleifer & Vishny, 1986). Therefore, to control conflicts of interests and

reduce agency costs, various internal and external tools, known as corporate governance,

have been suggested. For example, a board of directors is established as a solution for

such conflicts. The board of directors is considered to be the strongest internal monitor of
 3

the top management because the board has the power to hire, fire, and compensate the top

management (Fama & Jensen, 1983).

Another solution for managing conflict of interest is to tie the managers’

compensation to the performance of the firm. However, when having an efficient board

of directors, that provides required information, the compensation of top management is

less likely to be based on firm performance (Eisenhardt, 1989). A strong corporate

governance structure would eliminate, or at least reduce, the conflict of interests between

the stockholders and management. The efficiency of corporate governance structures is

most likely to be enhanced if the role of the board of directors as a tool of control is

explicitly emphasized. Kyereboah-Coleman, Adjasi, and Abor (2006) argued that

corporate governance structures influence corporate performance of Ghanaian

companies.

Three critical issues motivate the current study. First, Smith (1990) argued that

conflict of interest might exist among stakeholders such as managers, stockholders, and

creditors because business decisions that maximize the welfare of one of these groups

frequently minimize the welfare of others. Second, Lehmann, Warning, and Weigand

(2004) argued that, “the informational asymmetry gives the manager discretion for

opportunistic behavior. Management may pursue their own goals; divert funds for their

own benefits; invest, and finance inefficiently so that profitability is lowered” (p. 208).

The existence of such conflicts of interest between owners and managers may affect the

quality of earnings; and consequently, the conflicts may affect the bank’s performance.

Third, the current study is also motivated by the scandals of Enron, Arthur Anderson,

WorldCom, and Adelphia (Heffes, 2003). These practices have increased awareness
 4

making researchers think in depth about how accounting principles can be managed to

present a misleading conclusion. In this perspective, corporate governance structure has

become a topic of extensive discussion.

Statement of the Problem

The current quantitative correlational study addresses the problem that arises due

to the existence of conflict of interests between stockholders and management, within the

system of the corporate governance structure, and which may affect the quality of bank

performance in Saudi Arabia. The reason for choosing the quantitative methodology of

research lies within the nature of this research model, which depends upon “a description

of trends or an explanation of the relationship among variables” (Creswell, 2005, p. 45).

The characteristics of the quantitative research methodology provide a framework for the

current study that focuses upon the use of a specific and narrow purpose by measuring

observable data. The current study covers the Saudi banking sector that consists of 12

local commercial banks and 10 foreign commercial banks.

Clearly, without fundamental knowledge, the whole idea of modern corporate

governance would be hard to understand. For example, until 2006, Saudi Arabia had no

uniform corporate governance standards and there was no well-defined code that could be

enforced (Sharif, 2006). Therefore, the listed companies had little disclosures and had no

transparency.

Current Saudi problems in this area result from large cultural difficulties and

misunderstanding of the corporate governance concept not only by managers and

directors, but also by legislators, stockholders, and the public. In November 2006, the

Saudi Capital Market Authority (CMA) has issued a corporate governance code in the
 5

Arabic language. The CMA has issued this code because it believes that its duty and

mission are to carry out the development of the financial market in the light of the

growing international concern. In addition, the principles of corporate governance are the

most important mechanisms that measure the regularity and efficiency of the financial

market, and thus enhance the market and increase the attractiveness of traded securities.

Purpose of the Study

The purpose of this quantitative correlational study is to examine the relationship

between the efficiency of corporate governance structure and bank performance in Saudi

Arabia. A two-step quantitative research design was employed to accomplish the purpose

of the current study: Data Envelopment Analysis (DEA) and panel regression analysis.

DEA is a non-parametric mathematical programming methodology that can be used to

evaluate the efficiency of a variety of organizations using multiple inputs and multiple

outputs (Yue, 1992). This methodology can measure the efficiency of the corporate

governance structure in an objective way. The DEA was employed in order to get

efficiency scores of banks. Next, the efficiency scores generated from the DEA program

were used as independent variables in a panel regression model to explain bank

performance, the dependent variable (Lehmann et al., 2004).

The current study explored the extent of a possible relationship between the

efficiency of corporate governance structure and bank performance. For the current

study, data were collected from various sources, Reuters Knowledge database,

BANKSCOPE database, and financial reports of the nine listed banks in Saudi Arabia

during the period of 2004-2007. The specific population of the current study covered only
 6

the listed banks on the Saudi Stock Exchange. Non-listed Saudi banks and foreign banks

were excluded from the current study because they did not have enough data.

The findings of the current study contributed to the body of knowledge. In

addition to filling a knowledge gap, they could be used to influence the change in

corporate governance structure of Saudi banks helping improve financial performance.

The banking sector can lead the way for corporate governance changes in other

organizations throughout Saudi Arabia which are likely to lead to improved

productivities and corporate performance. Overall, this is expected to have a positive

impact on the whole Saudi Arabian economy.

Significance of the Study

Leaders within the Saudi Stock Exchange and CMA environments focus on

establishing a corporate governance code that can regulate listed companies in Saudi

Arabia. Since the corporate governance concept is new in Saudi Arabia, few research

studies have so far investigated whether the corporate governance structure is efficient in

Saudi banks or not. The rationale behind studying the effect of corporate governance

structure on banks’ performance may be a factor in helping investors to invest in a

specific bank. If the quality of bank performance is affected by the efficiency of

corporate governance structure, then the blockholders need to monitor the management in

order to reduce the effect of the conflict of interests resulting from agency costs on the

bank profitability. Furthermore, potential long-term investors will invest only in banks

with higher profitability and more efficient corporate governance structure.

The results of the current study will add to prior quantitative research studies

related to corporate governance structure and corporate performance, particularly the

 7

Saudi case. The current study used a quantitative, correlational analysis method. The

current study will add to the existing body of literature in the areas of corporate

governance, capital structure, and investment. The results of the current study are

anticipated to be of use in asset management business by providing the leadership with

essential information in selecting the right investment. The current study will also

contribute to a better understanding of the corporate governance structure and its

components. The results are limited to the population of the commercial banks, which are

operating in Saudi Arabia, to facilitate better corporate governance of public

organizations for improving performance.

Nature of the Study

The current research attempted to identify any relationships that may exist

between the corporate governance structure efficiency and corporate performance. The

best research methodology to be used to obtain this knowledge is to conduct a

quantitative correlational study that examines the relationship between the efficiency of

corporate governance structure and bank performance in Saudi Arabia. A two-step

quantitative research methodology was employed to accomplish the purpose of the

current study: DEA and panel regression. DEA, a non-parametric mathematical

programming methodology was used to evaluate the efficiency of the corporate

governance structure of the Saudi listed banks in order to get efficiency scores of banks.

Next, the efficiency scores generated from the DEA program were used as independent

variables in a panel regression model to explain bank performance.

The reason for choosing the quantitative methodology of research lies within the

nature of this research model, which depends upon “a description of trends or an

 8

explanation of the relationship among variables” (Creswell, 2005, p. 45). The

characteristics of the quantitative research methodology provide a framework for the

current study that focuses upon the use of a specific and narrow purpose by measuring

observable data. These data were collected from various sources, Reuters Knowledge

database, BANKSCOPE database, and financial reports of the nine listed banks in Saudi

Arabia during the period of 2004-2007.

Research Question

In a quantitative study, the question should be presented in a narrow and specific

manner for obtaining measurable and observable data on the variables that are being

investigated (Creswell, 2005). The following research question had been developed for

the investigation:

Research Question: To what extent would corporate governance structure matter

for banks’ performance?

Hypotheses

One hypothesis was developed and investigated during the current correlational

designed study that examined a possible relationship between the corporate governance

structure and banks’ performance. The following are the null and alternative hypotheses

that were tested during the current study.

H0: There is no relationship between an efficient corporate governance structure

and performance.

Ha: There is a relationship between an efficient corporate governance structure

and performance.
 9

Theoretical Framework

The theoretical perspective that guided the current study is linked to the idea that

banks with an efficient corporate governance structure have better performance than

those without it. Jensen and Meckling (1976) showed that well-governed firms might

have more efficient operations. In the light of academic works of Jensen and Meckling

(1976) and Fama (1980), many studies have discussed corporate governance structure

with a focus on the agency theory. Krafft and Ravix (2005) defined corporate governance

as “the general system by which firms are owned and managed” (p. 125). Kawaura

(2004) found that the ineffective governance structure is responsible for the crisis of

Japanese banks in the 1990s. Lehmann et al. (2004) examined if companies that have

more efficient governance structure have higher performance. They found that the

performance differences between companies were significantly explained by the

governance efficiency of companies.

Empirical studies showed mixed results on the relationship between the corporate

governance structure and corporate performance. A set of literatures showed a positive

and significant relationship between blockholders ownership and corporate performance

(e.g., Haniffa & Hudaib, 2006; Joh, 2003; Leech & Leahy, 1991; McConnell & Servaes,

1990; Xu & Wang, 1999). Another set of literatures showed no significant relationship

between ownership concentration and corporate performance (e.g., Demsetz & Lehn,

1985; Murali & Welch, 1989). Using ordinary least squares (OLS) regression, Demsetz

and Lehn (1985) examined the forces that may affect ownership structure of 511 large

U.S. companies, which were “value-maximizing size,” “control potential,” and

“systematic regulation” (p. 1158). They found no significant relationship between

 10

ownership concentration and corporate performance. Using a logistic regression, Murali

and Welch (1989) examined the relationship between majority ownership and firm value.

They found that corporate performance was unaffected by majority ownership, which

means majority ownership does not necessary maximize firm value.

Definition of Terms

Following Lehmann et al.’s (2004) research study, the following terms were used

as operational definitions within the current study. In DEA program, the corporate

governance structure was used as inputs while the corporate performance was used as

outputs. The corporate governance structure consists of two dimensions: Identity of

owners and capital structure. Identity of owners represents the major owner of the bank-

blockholders, so the identity of blockholders is defined as (1) family, (2) government, (3)

local, and (4) foreigner investors (Lehmann et al., 2004). The capital structure is defined

as the ratio of debt to total equity and debt (Lehmann et al., 2004).

The corporate performance consists of three dimensions: (a) investment, (b)

growth, and (c) profitability. Investment dimension is defined as the quarterly spending

on fixed assets divided by total assets (Lehmann et al., 2004). Growth dimension is

defined as the quarterly change in the book value of total assets (Ezzamel & Watson,

1993). Profitability dimension is defined as return on assets (ROA) (Lehmann et al.,

2004).

In the panel regression analysis, the dependent variable is bank performance:

either return on asset or stock return. Stock return is defined as a change in stock price

from quarter to quarter (Bauer, Guenster, & Otten, 2004). The independent variables are
 11

the explanatory efficiency scores of the corporate governance structure generated from

the DEA.

Assumptions

In the first half of 2008, Saudi Arabia had only 12 local commercial banks;

however, only 11 banks were listed and traded on the Saudi Stock Exchange. The current

study excluded the non-listed bank, National Commercial Bank, and the new listed

banks, Alinma Bank and Bank Al Bilad. New listed banks were excluded because they

have been recently listed on the Saudi Stock Exchange and they did not have the required

data that cover the period 2004-2007. The current study assumed that the nine listed

banks on the Saudi Stock Exchange represent the population of the banks in Saudi

Arabia.

The purpose of the current quantitative correlational study is to test the theory of

corporate governance that relates the efficiency of corporate governance structures to

bank performance for the listed banks on the Saudi Stock Exchange. The current study

assumed that the governance structures of the banks are well described by their capital

structures and ownership structures, as introduced by Jensen and Meckling (1976). It also

assumed that the governance structure can determine the bank’s investment, growth,

profitability (Lehmann et al., 2004), and stock return (Bauer et al., 2004).

Limitations

Validity of the results of the current study is limited to the reliability of the DEA

program used to obtain the efficiency scores that measure the efficiency of a bank’s

corporate governance structure. Internal and external validity can be evaluated by using

sensitivity analysis to test the robustness of DEA efficiency scores to changes in the
 12

methods and data used (Ganley & Cubbin, 1992). The efficiency scores obtained from

the DEA model were tested for internal validity and external validity by using Pearson

correlation test (Parkin & Hollingsworth, 1997). Internal validity tests compare the

efficiency scores using different selections of inputs and outputs. External validity tests

compare the consistency of the efficiency scores over time.

The current study focused only on the relationship between stockholders and

management. The research investigated only the local commercial banks. Meaning, this

research was limited to the sample size of 11 subjects (banks) that were listed and traded

on the Saudi Stock Exchange. Two local banks were excluded because they have recently

been listed on the Saudi Stock Exchange and they did not have the required data that

cover the period 2004-2007. None of the foreign commercial banks were listed on the

Saudi Stock Exchange. The results of the current study were limited to the banks

operating in Saudi Arabia.

Delimitations

The current study confined itself to investigating the nine listed banks on the

Saudi Stock Exchange that have available data from 2004 to 2007. It focused on the

corporate governance structure and corporate performance. The corporate governance

structure has two dimensions: Identity of owners and capital structure. Identity of owner

represents the major owner of the bank-blockholders: (1) family, (2) government, (3)

local, and (4) foreigner investors. The capital structure is the ratio of debt to total equity

and debt. The corporate performance consists of three dimensions: investment, (a)

investment, (b) growth, and (c) profitability. The current study did not look at the non-

listed and the newly listed banks that did not have enough data.
 13

Summary

The purpose of the current study is to examine the relationship between the

corporate governance structure’s efficiency and banks’ performance in Saudi Arabia.

Three critical issues motivate the current study. First, conflicts of interest may exist

among stakeholders such as managers, shareholders, and creditors because the business

decisions that maximize the welfare of one of these groups frequently minimize the

welfare of the others (Smith, 1990). Second, informational asymmetry in the market

gives managers discretion for opportunistic behavior (Lehmann et al., 2004). That is, the

top management might manage the company’s resources for their own interests in a way

that may lower profitability. The existence of such conflict of interests between owners

and managers may affect the quality of earnings; and may consequently affect the banks’

performance.

The presence of agency costs and conflict of interests result in reducing

stockholders’ interests, and this may negatively affect corporate performance. Third, the

current study is also motivated by the scandals of Enron, Arthur Anderson, WorldCom,

and Adelphia. One may ask: Was corporate governance structure an issue here? Where

were the board of directors and stockholders when top management was playing lose

with the funds and accounting practice?

 14

CHAPTER 2: LITERATURE REVIEW

Chapter 1 in the current study presented the problem statement, background, and

purpose of the study along with the theoretical structure and significance of the study in

relation to the theory of corporate governance. This chapter investigates previous

research that was completed, which helps to provide a background framework for the

current study. The major points of the relationship between corporate governance

structure and corporate performance are explored.

The purpose of this review of literature is to summarize current theories and

research on ownership of blockholders, capital structure, investment, growth, and

profitability as they relate to the relationship between the efficiency of corporate

governance structure and corporate performance.

In recent years, the banking sector in Saudi Arabia has become more competitive

under the new regulations of the Saudi Arabian Monetary Agency (SAMA) that allows

foreign commercial banks to practice their businesses in the Kingdom. SAMA, the

Central Bank, regulates the Saudi banking industry. In the first half of 2008, the banking

sector consists of 12 local commercial banks and 10 foreign commercial banks. The local

banks are Alinma Bank, Al Rajhi Bank, Arab National Bank, Bank Al Bilad, Bank Al

Jazira, Banque Saudi Fransi, National Commercial Bank, Riyad Bank, Samba Financial

Group, Saudi British Bank, Saudi Hollandi Bank, and Saudi Investment Bank. The

foreign banks are Bank Muscat, BNP Paribas, Deutsche Bank, Emirates Bank, Gulf

International Bank, J. P. Morgan Chase N.A., National Bank of Bahrain, National Bank

of Kuwait, National Bank of Pakistan, and State Bank of India. The Gulf International

Bank is the first foreign bank that obtained a license to operate in Saudi Arabia, in July
 15

1999 (SAMA, 2008). SAMA was established by King Saud by the Royal Decree No. 23

dated December 15, 1957 (“SAMA,” 1957).

In the new phase of globalization and market economic liberalization, the listed

commercial banks on the Saudi Stock Exchange are facing serious competition especially

in both asset management and corporate banking. This may negatively affect the market

share of the local banks. In addition, compared to Saudi commercial banks, foreign

commercial banks have traditional corporate governance structures. The lack of a well-

defined corporate governance code in Saudi Arabia may raise a research question. Does

the efficiency of corporate governance structure matter for bank performance?

The purpose of the current quantitative correlational study is to test the theory of

corporate governance that relates the efficiency of corporate governance structures to

bank performance for the banks listed on the Saudi Stock Exchange. The current study

assumed that the governance structures of banks are well described by their capital

structures and ownership structures, as introduced by Jensen and Meckling (1976). It also

assumed that the governance structure can determine the bank’s investment, growth,

profitability (Lehmann et al., 2004), and stock return (Bauer et al., 2004). In the Data

Envelopment Analysis (DEA) program, the corporate governance structure is used as

input while the banks’ performance is used as output. DEA is a non-parametric

mathematical programming methodology that can be used to evaluate the efficiency of a

variety of organizations using multiple inputs and multiple outputs (Yue, 1992). This

methodology can measure the efficiency of the corporate governance structure in an

objective way. The DEA technique was initially proposed by Charnes et al. (1978). The

corporate governance structures consist of two dimensions: ownership structure and

 16

capital structure. Banks’ performance consists of three dimensions: (a) investment, (b)

growth, and (c) profitability.

The ownership structure represents the major owner of the bank (i.e.,

blockholders), so the identity of blockholders is defined as (1) family (a wealthy family

other than the royal family), (2) government, (3) local, and (4) foreigner investors

(Lehmann et al., 2004). The capital structure is defined as the ratio of debt to total equity

and debt (Lehmann et al., 2004). Investment dimension is defined as the quarterly

spending on fixed assets divided by total assets (Lehmann et al., 2004). Growth

dimension is defined as the quarterly change in the book value of total assets (Ezzamel &

Watson, 1993). Profitability dimension is defined as return on assets (ROA) (Lehmann et

al., 2004).

A two-panel regression analysis is conducted. In the first panel regression model,

the dependent variable is ROA and the independent variables are explanatory efficiency

scores of the corporate governance structure generated from the DEA. In the second

panel regression model, the explanatory efficiency scores are regressed against stock

return. Stock return is defined as a change in stock price (Bauer et al., 2004) from quarter

to quarter.

Chapter 2 presents a review of historical, recent, and emergent literature relating

to systems theory and a description of the research methodology used. Many models and

theories, along with the corporate governance theory, were reviewed for building a solid

empirical base for the current study. The review of literature is summarized to provide a

foundation upon which the current quantitative correlational study is built. This chapter is

divided into the following sections, which are, the corporate governance concept, the
 17

Sarbanes-Oxley act, corporate governance principles, the Saudi corporate governance

code, corporate finance theory, agency theory, conflict of interests, corporate governance

structure and corporate performance, summary, and conclusion.

Corporate Governance Concept

In the light of the academic works of Jensen and Meckling (1976) and Fama

(1980), many studies have discussed corporate governance structure with a focus on the

agency theory. Agency theory examines the relationship between stockholders and

management. Krafft and Ravix (2005) defined corporate governance as “the general

system by which firms are owned and managed” (p. 125). The relationship between

stockholders and management is one of the components of corporate governance

structure. Shleifer and Vishny (1997) argued:

Corporate governance deals with the ways in which suppliers of finance to

corporations assure themselves of getting a return on their investment. How do

they make sure that managers do not steal the capital they supply or invest it in

bad projects? How do suppliers of finance control managers (p. 737)?

The concept of corporate governance continues to be a center of attention in

various national and international environments. Kawaura (2004) found that the

ineffective governance structure is responsible for the crisis of Japanese banks in the

1990s. Lehmann et al. (2004) examined if companies that have more efficient governance

structure have higher performance. They found that the performance differences between

companies were significantly explained by the governance efficiency of companies.

Corrupted practices, such as the Enron, Arthur Anderson, WorldCom, and

Adelphia scandals have put corporate governance on the table for deep discussion in
 18

several academic conferences and scholarly journals. Recent progress in corporate

governance is based on a corporate foundation of more than 100 years of research on this

topic by academics in both law and economics in the United States and other Western

countries (Burlaka, 2006). Could a better corporate governance structure have prevented

some of the unethical business practices these company leaders engaged in? In spite of

many actions taken to enforce ethical decision-making in corporations, business ethics

continue to be the current focus of academia, government regulators, and corporate

stakeholders. For example, the U.S. government issued the Sarbanes-Oxley act in 2002 to

protect investors’ investments and to prevent further loss of confidence in the U.S. stock

market.

Sarbanes-Oxley Act

As a result of the Enron, Arthur Anderson, WorldCom, and Adelphia scandals,

investors all over the world experienced a “$7-plus trillion in stock and investor losses”

(Heffes, 2003, p. 18). Consequently, to protect the investors’ investments and to prevent

further loss of confidence in the U.S. stock market, the U.S. government implemented

several programs to increase control on corporate governance and one of the insightful

programs was the Sarbanes-Oxley (SOX) Act. The U.S. government created the SOX act

in 2002 to reform and strengthen corporate governance and to bring back investors’

confidence (Carver, 2005).

The intention of the SOX act was to establish a set of rules to be abided by for all

U.S. public companies and therefore, mitigate the risk of scandals similar to Enron,

WorldCom, and Adelphia. The SOX required all public companies to implement fully the

established guidelines and control measures stipulated in the act. In addition to the
 19

specific controls, the SOX act created a nonprofit independent Public Company

Accounting Oversight Board (PCAOB). The PCAOB’s objectives are to supervise

auditors, validate their independence, review corporate responsibility, assess the quality

of financial disclosures, and investigate fraud (McDonnell, 2004).

Implementing the SOX act is costly. Koehn and Vecchio (2004) have discussed

the impact of the SOX act of 2002 on many issues that are related to applying corporate

governance guidelines. Some of these effects are as follows: positive influence on audit

committee activities, increase in accounting costs, impact on private companies that are

required to show compliance with internal control, increase in volume of corporate

disclosures, and stockholders have no rights to nominate candidates for the board of

directors (Koehn & Vecchio, 2004). The lesson, that can be learned when corporate

governance structure fails to resolve the agency problems, is that a new, complex, and

expensive governance structure regime tends to result in reaction to implement new

legislations. Therefore, each listed bank in Saudi Arabia needs to have an efficient

corporate governance structure that implements corporate governance principles.

Corporate Governance Principles

A revised set of corporate governance principles was issued by the Organization

for Economic Co-operation and Development (OECD) in 2004. These principles, which

have been influenced by stockholders value, have focused on: (a) financial issues that

play an important role in the way companies are governed; (b) information asymmetry

between stockholders and management must be excluded, and (c) an organizational

contractual structure must be generalized within the company (Krafft & Ravix, 2005).

These principles help corporations to improve their corporate governance structure.

 20

Bauer et al. (2004) argued, “the excess returns to corporate governance should translate

into a higher firm valuation for better-governed firms” (p. 103). Having an efficient

corporate governance structure would lead to better performance. Khanchel El Mehdi

(2007) found a strong relationship between governance and corporate performance.

Jensen and Meckling (1976) showed that well-governed firms might have efficient

operations. Banks with well-defined corporate governance structures seem to have clear

business strategies and efficient operation strategies. However, Mahoney (2006) found no

evidence that new disclosures requirements reduced the informational asymmetry. The

reason for such evidence could be that requirements of new disclosures are not fully

implemented. Kumar, Bhole, and Saudagaran (2003) found that Indian firms that are

listed on London and Luxembourg exchanges do not act the way U.S. listings act, so they

could not reduce the informational asymmetry between managers and external investors.

This assures that Saudi banks need to have a well-defined corporate governance code.

Saudi Corporate Governance Code

Clearly, without fundamental knowledge, the whole idea of modern corporate

governance would be hard to understand. For example, until 2006, Saudi Arabia had no

uniform corporate governance standards, meaning there was no well-defined code that

could be enforced (Sharif, 2006). Therefore, listed companies had little disclosures and

had no transparency. Current Saudi problems in this area result from large cultural

difficulties and misunderstanding of corporate governance concept not only by managers

and directors, but also by legislators, stockholders, and the public. In November 2006, the

Saudi Capital Market Authority (CMA) has issued a corporate governance code in the

Arabic language.
 21

Based on the articles V and VI of the financial market, and after reviewing the

Article No. 29 of the registration and listing rules issued by the Council of the CMA, the

Council passed the resolution No. (1-212-2006) on November 12, 2006 to approve the

Code of Corporate Governance in the Kingdom of Saudi Arabia (CMA, 2006). The CMA

has issued this code because it believes that issuing this code is one of its duty and

mission towards the development of the financial market in the light of growing

international concern. In addition, the principles of corporate governance are the most

important mechanisms that measure the regularity and efficiency of the financial market,

and thus enhance the market and increase the attractiveness of traded securities. This

code includes 19 articles. In preparing this code, the CMA has taken into account the

principles endorsed by international organizations and the experience of other countries,

which have endorsed laws or rules in the area of corporate governance. Then it has taken

into account the observations and the numerous suggestions received after the publication

of the first draft in August 2006.

Corporate Finance Theory

The main context of finance theory is the study of economic agents’ behavior in

allocating their resources in an uncertain environment (Merton, 1995). This may raise a

question, would management behave in managing firm’s resources for their own interests

or for stockholders’ interests? Mulvey and Allen (2000) argued that, based on modern

finance theory, market efficiency prevents individuals from gaining economic advantage

over others. This would be true when management fully discloses company information.

Dawson (1984) argued that the finance theory assumes that all information is available

and free for all stakeholders. That is, there is no transaction cost. Fama (1978) argued that
 22

in a perfect capital market, there are no transaction costs or bankruptcy costs; there are no

taxes; there are no agency costs; and there is full and costless information. However, in

reality, there may not be an efficient market that provides equal and free information for

all investors. It depends on how much the investors intend to pay for information in order

to get more economic advantages. For example, Jarrett and Kyper (2006) argued that the

weak form of the hypothesis of market efficiency is questionable. Treynor (1981) has a

different view about the hypothesis of market efficiency. Treynor (1981) argued, “the

securities market will not always be either quick or accurate in processing new

information” (p. 56). Fama (1995) argued:

If the random walk theory is valid and if security exchanges are “efficient”

markets, then stock prices at any point of time will represent good estimates of

intrinsic or fundamental values. Thus, additional fundamental analysis is of value

only when the analyst has new information, which was not fully considered in

forming current prices, or has new insights concerning the effects of generally

available information, which are not already implicit in current prices (p. 80).

In the light of Modigliani and Miller’s (1958) study, Proposition I states that all

firms’ stocks that have the same pattern of return have the same prices. Investors should

be aware when similar firms are different in prices. They need to dig deeply in the firm’s

financial and non-financial information before making any investment decision.

Proposition II holds that the return on equity (ROE) increases linearly with financial

leverage (Modigliani & Miller, 1958). This introduces the concept of capital structure.

Would management pursue debt or equity in financing the company’s capital

 23

expenditures? Proposition III states that the marginal cost of the capital of a firm is equal

to the average cost of capital (Modigliani & Miller, 1958).

The context of Modigliani and Miller’s propositions is similar to Fama’s (1978)

assumptions of the perfect capital market. In their 1963 tax correction study; however,

Modigliani and Miller found that the corporate taxes have a direct effect on the cost of

capital. That is, the tax advantage of debt is greater than what they suggested in

Proposition I in their 1958 article. Miller (1977) found that tax advantage of debt depends

on marginal tax rates. Investors need to be aware when a company can benefit from debt-

taxes-deductible. Jensen and Meckling (1976) found that the optimal capital structure

minimizes agency costs. This would increase the wealth of stockholders. Modigliani

(1982) found that financial leverage is influenced by average tax rates and risk. This

discussion leads to introducing agency theory and conflict of interests that is related to

corporate governance theory.

Agency Theory

Agency theory refers to the study of management acting as agents of control for

others, that is, their stockholders (Chew, 2003). Agency theory separates control function

from ownership. An agency relationship is considered as a contract signed between

owners (the principals) and management (the agent) that allows the management to

perform, on behalf of the owners, some functions and activities that involve delegating

decision-making authority (Smith, 1990). “Agency theory offers a useful way of

understanding the complex authority relationship between top management and the board

of directors” (Jones, 2004, p. 43). The board of directors plays an essential role in

monitoring management behaviors. The concept of agency theory depends on a well-

 24

defined relationship between managers and stockholders (Williams & Findlay, 1983).

This relationship is important in building an efficient corporate governance structure.

Fama (1980) explained how the separation of the ownership and control in large

corporations could be an efficient form of economic business. For the sake of economic

efficiency, the top management is required to serve in the interests of stockholders to

maximize firm value. Eisenhardt (1989) argued that agency theory contributed into

incentives, uncertainty, and risk. The agency theory has encouraged management

practice, which gives managers the opportunity to run the business for their own interests

away from stockholders’ interests (Rynes & Shapiro, 2005). To prevent such

opportunistic behaviors, uncertainty, and risks, the corporations need to have an efficient

corporate governance structure. Kole and Lehn (1999) found that agency theory predicts

adapting corporate governance structure. Demsetz and Lehn (1985) found that ownership

structure differs in line with stockholders’ attempts to optimize firm value. They

confirmed that business environment is one of the determining factors of corporate

governance structure.

Conflict of Interests

Smith (1990) argued that conflicts of interests might exist among stakeholders

such as managers, stockholders, and creditors because business decisions that maximize

the welfare of one of these groups often minimize the welfare of others. The presence of

conflicts of interests among stakeholders is the main cause of inefficient corporate

governance structures. Conflict theory is referred to as “the extent to which participants’

interests diverge and values of stakeholders conflict” (Scott, 2003, p. 76). The board of

directors needs to find solutions that manage stockholders-management relationship and

 25

align their interests. However, Gomez-Mejia, Wiseman, and Dykes (2005) argued that

the agency theory’s assumption of self-interest is not necessarily to be a sign of

opportunistic behavior. This would be true when corporations have strong and efficient

corporate governance structures. Lennox (2005) argued that when agency problems

become enormous, agency theory expects more demand for qualified auditors as well as

legislation such as the SOX act.

The core of the agency theories is how to resolve conflicts resulting from the

separation of ownership and management control of corporate resources (Fama & Jensen,

1983; Jensen, 1986). In the modern concept of the corporation, common stockholders

take little or no active participation in the management of the firm. Instead, stockholders

usually hire professional managers to operate the firm in a manner consistent with the

stockholders’ best interests. However, giving the managers control over the resources of

the company gives them the opportunity to use the firm’s resources for their own

interests, regardless of the effect on the company’s stockholders. Jensen and Meckling

(1976) interpret managerial discretion as a result of the informational asymmetry that

leads to agency problems and increases agency costs.

The separation of the activities of ownership and management and the presence of

informational asymmetry may cause conflicts of interests. The manager’s self-interest

could lead to the misuse of bank resources, for instance, through investing in risky and

imprudent projects at the expense of the stakeholders who provide capital (Jensen &

Meckling, 1976; Shleifer & Vishny, 1986). Therefore, to control conflicts of interests and

reduce agency costs, various internal and external tools (known as corporate governance)

have been suggested. For example, a board of directors is established as a solution for
 26

such conflicts. The board of directors is considered as the strongest internal monitor of

the top management because the board has the power to hire, fire, and compensate the top

management (Fama & Jensen, 1983).

Another solution for managing the conflict of interest is to tie top managers’

compensation to the performance of the firm. However, when having an efficient board

of directors that provides required information, the compensation of top management is

less likely to be based on firm performance (Eisenhardt, 1989). A strong corporate

governance structure would eliminate or at least reduce the conflicts of interests between

the stockholders and management. The efficiency of corporate governance structures is

most likely to be enhanced if the role of the board of directors as a tool of control is

explicitly emphasized. Kyereboah-Coleman et al. (2006) argued that corporate

governance structures influence corporate performance of Ghanaian companies.

Corporate Governance Structure and Corporate Performance

Tricker (2000) has defined corporate governance as “the exercise of power over

corporate entities” (p. 403). Because of the separation between ownership and

management control, the need for an efficient corporate governance structure has become

necessary. The corporate governance structure operates through two agency relationships:

between stockholders and management; and between employees and management (Child

& Rodrigues, 2004). The current study focused only on the relationship between

stockholders and management. The current study assumed that governance structures of

banks are well described by their capital structures and ownership structures, as

introduced by Jensen and Meckling (1976). It also assumed that the governance

structures can determine the bank’s investment, growth, profitability (Lehmann et al.,
 27

2004), and stock return (Bauer et al., 2004). Caton and Goh (2008) found that firms with

democratic governance structures experience significant positive abnormal stock returns.

Bauer et al. (2004) have examined if efficient corporate governance leads to

higher stock return. They found that an efficient corporate governance structure

positively affected stock return. In their article, Karathanassis and Drakos (2004)

examined the impact of ownership structure on corporate performance of companies

listed on the Athens Stock Exchange during 1996-1998. They argued that the presence of

agency costs has resulted in reducing stockholders’ wealth and has negatively affected

corporate performance. This may lead to saying that having an efficient corporate

governance structure might minimize the agency costs. Ezzamel and Watson (1993)

found that the presence of external members of the board of directors had little effect on

the profitability. However, Krivogorsky (2006) found a strong positive relationship

between external independent members of the board of directors and profitability. In the

next sections, the current study tackled the corporate governance dimensions:

blockholders ownership and capital expenditures; and corporate performance dimensions:

investment and growth.

Blockholder Ownership

The ownership structure represents the major owners of the bank (i.e.,

blockholders). Blockholder is defined as: a (1) family, (2) government, (3) local, and (4)

foreigner investor. What motivates investors to own a large stake in a single bank?

Holderness (2003) argued that blockholder ownership is motivated by shared and private

benefits of control. Both shared and private benefits of control increase with

accumulating control rights that enables blockholders to monitor the management

 28

(Lehmann et al., 2004). Shared benefits of control have a positive effect on management

behavior and corporate performance; however, private benefits of control have a negative

effect (Lehmann et al., 2004). Both positive and negative effects of ownership

concentration are reflected by company efficiency and company performance

(Bartelsman & Doms, 2000; Lehmann et al., 2004).

Blockholders have greater incentives to control stockholders’ and management’s

interests resulting in better corporate performance (Li & Simerly, 1998). They own large

stocks and they are willing to put extra efforts to monitor management; and therefore,

they can influence management to improve corporate performance. Thomsen and

Pedersen (2000) found that blockholders have a significant impact on corporate

performance. Meaning, the profitability is positively and significantly influenced by large

ownership. Blockholders; however, may damage corporate performance as a result of

large exposure to a company’s risk (Demsetz & Lehn, 1985).

Empirical studies have shown mixed results on the relationship between

ownership concentration and corporate performance. On one hand, research by

Holderness and Sheehan (1988) analyzed 114 NYSE/AMEX listed companies with

majority ownerships, individuals and institutions. They found a positive relationship

between blockholders ownership and corporate performance. Xu and Wang (1999)

investigated if the structure of ownership impacts corporate performance of listed

Chinese companies within the theory of corporate governance. They showed a positive

and significant relationship between blockholders ownership and corporate performance.

Research by McConnell and Servaes (1990) examined the relationship between

the structure of ownership and Tobin’s Q for a sample of 1,173 companies in 1976 and
 29

1,093 companies in 1986. Tobin’s Q, “defined as the ratio of the market value of a firm to

the replacement cost of its assets evaluated at the end of the fiscal year of each firm, has

been widely employed in the field of corporate finance” (Lo & Sheu, 2007, p. 351).

McConnell and Servaes (1990) found a positive relationship between blockholders

ownership and corporate performance. They showed that institutional stockholders were

more effective in monitoring management than individual stockholders (1990).

A study by Leech and Leahy (1991) examined three scenarios of large British

companies: ownership concentrations and control, the impact of ownership structure on

corporate behavior and performance, and factors identifying ownership concentration and

control types. They found that blockholders ownership has a positive and significant

effect on corporate performance. Joh (2003) examined how the structure of ownership

and conflict of interests among stockholders affected corporate performance under

inefficient corporate governance structures prior to the crisis in Korea during 1993-1997.

The author found that Korean companies with large ownership performed better than

those with small ownership.

Research by Hanousek, Kočenda, and Svejnar (2007) analyzed the impacts of

changes in ownership structure and ownership concentration on corporate performance of

Czech Republican companies. They found that blockholders’ ownership has a positive

effect on corporate performance. A study by Fernández and Gómez-Ansón (2005)

examined the effects of ownership structure on corporate performance of Spanish

companies. They found a positive relationship between stock ownership concentration

and corporate performance. Haniffa and Hudaib (2006) tested the relationship between

the corporate governance structure and corporate performance of 347 Malaysian listed
 30

companies during 1996-2000. They found that the top five largest blockholders

ownerships were significantly associated with both stock return and accounting

performance of Malaysian companies. Shen, Hsu, and Chen (2006) examined the

relationship between the structure of ownership, firm value, and factors that created the

firm value of Taiwanese companies. They found that institutional blockholders

ownership was significantly associated with stock price.

On the other hand, a study by Demsetz and Lehn (1985) examined the forces that

may affect ownership structure of 511 large U.S. companies, which were “value-

maximizing size,” “control potential,” and “systematic regulation” (p. 1158). They found

no significant relationship between ownership concentration and corporate performance.

Murali and Welch (1989) examined the relationship between majority ownership and

firm value. They found that corporate performance was unaffected by majority

ownership, which means majority ownership does not necessary maximize firm value.

Capital Structure

In the current study, the capital structure is defined as the ratio of debt to total

equity and debt. Based on the pecking-order theory of capital structure, companies prefer

internal to external financing (Myers, 1984; Ni & Yu, 2008), and debt to equity when

issuing securities (Myers, 1984). Instead of issuing new equities, firms with an efficient

corporate governance structure prefer using retained earnings to finance their investment

projects. In addition, well-governed firms prefer using debt to equity because debt is less

expensive. Abor (2005) found that there is a positive and significant relationship between

debt and profitability, which means profitable firms prefer debt to equity in financing

their capital expenditures.

 31

Investment and Growth

Investment is defined as the quarterly spending on fixed assets divided by total

assets (Lehmann et al., 2004) and growth is defined as the change in the book value of

total assets (Ezzamel & Watson, 1993). Lehmann et al. (2004) argued that tangible

investment and growth are driving forces of future returns for corporations. Top

management can control investment and growth of the firm (Lehmann et al., 2004). The

management may invest in risky and imprudent projects at the expense of the

stakeholders (Jensen & Meckling, 1976; Shleifer & Vishny, 1986). Any managerial

misuse could be reflected in the bank’s growth or over investing in non-productive fixed

assets (Lehmann et al., 2004). An efficient corporate governance structure will prevent or

limit management from investing in risky and imprudent projects.

Summary

The agency theory examines the relationship between stockholders and

management. The relationship between stockholders and management is one of the

components of corporate governance structure. Lehmann et al. (2004) examined if

companies that have more efficient governance structure have higher performance.

Having an efficient corporate governance structure would lead to better performance.

Agency theory separates control function from ownership. This relationship is important

in building an efficient corporate governance structure. Kole and Lehn (1999) found that

agency theory predicts adapting corporate governance structure.

A strong corporate governance structure would eliminate or at least reduce the

conflicts of interests between the stockholders and management. Kyereboah-Coleman et

al. (2006) argued that corporate governance structures influence corporate performance
 32

of Ghanaian companies. Tricker (2000) has defined corporate governance as “the

exercise of power over corporate entities” (p. 403). Because of the separation between

ownership and management control, the need for an efficient corporate governance

structure has become necessary. The corporate governance structure operates through two

agency relationships: between stockholders and management; and between employees

and management (Child & Rodrigues, 2004).

Empirical studies showed mixed results on the relationship between ownership

concentration and corporate performance. A set of literatures has shown a positive and

significant relationship between blockholders ownership and corporate performance (e.g.,

Haniffa & Hudaib, 2006; Joh, 2003; Leech & Leahy, 1991; McConnell & Servaes, 1990;

Xu & Wang, 1999). Another set of research showed no significant relationship between

ownership concentration and corporate performance (e.g., Demsetz & Lehn, 1985; Murali

& Welch, 1989).

Chapter 3 of the current study discusses the research methodology and the DEA

program. Population, sample, subjects, and variables are discussed. Chapter 3 begins with

a statement of the chapter’s structure and purpose.

Conclusion

In Saudi Arabia, blockholders such as family, government, local, and foreigner

investors own large stakes in banks. Blockholders have greater incentive and are willing

to pay extra cost to monitor management (Li & Simerly, 1998). Blockholder ownership is

motivated by shared and private benefits of control (Holderness, 2003). Both shared and

private benefits of control increase with accumulating control rights that enables

blockholders to monitor the management (Lehmann et al., 2004). Logically, they have the
 33

power to influence the corporation’s policy and strategies in order to maximize the firm’s

value. From the above discussion, one might conclude that there could be a relationship

between efficient corporate governance structures and banks’ performance.

 34

CHAPTER 3: METHOD

A two-step quantitative research methodology, data envelopment analysis (DEA)

and panel regression analysis, was used in the current study. DEA is a non-parametric

mathematical programming methodology that can be used to evaluate the efficiency of a

variety of organizations using multiple inputs and multiple outputs (Yue, 1992). This

methodology can measure the efficiency of the corporate governance structure in an

objective way. It is different from traditional financial ratios that often measure banks

financial performance and management quality. Having an appropriate measurement tool

that can evaluate banks’ performance would be advantageous. Traditionally, analysts

often measure banks’ financial performance and management quality based on financial

ratios and stock price. Traditional financial measures such as profitability, liquidity, and

asset turnover are not enough to evaluate banks’ performance. Nowadays, measuring

bank efficiency and bank performance has become complicated, especially in the

presence of agency problems and conflict of interests among stakeholders. A unique

technique that can capture financial and non-financial information to measure bank

efficiency and bank performance is the current need of this complicated environment.

The advantage of employing the DEA model is that it uses actual sample data

(multi-inputs and multi-outputs) to measure the efficiency of each bank. Bauer et al.

(1998) argued that if the efficiency scores are linked to standard measures of

performance, authorities would be more confident that these scores are precise indicators

of performance and not just synthetic measures depending on specific assumptions. DEA

technique has been extensively employed in the banking industry in different countries

(See for example, Al-Muharrami, 2007; Gattoufi, Oral, & Reisman, 2004; Jemric
 35

& Vujcic, 2002; Kumar & Gulati, 2008; Lin, 2002; Ramanathan, 2007; Sanjeev, 2007;

Sufian, 2007; Sufian & Abdul-Majid, 2007; Pasiouras, 2008; Wang, Huang, & Lai, 2005;

Yalama & Coskun, 2007).

The DEA was used in order to get efficiency scores of banks. Next, the efficiency

scores generated from the DEA program are used as independent variables in a panel

regression model to explain bank performance (Lehmann et al., 2004). Using a panel

regression model, a non-parametric method and multivariate analysis may assist in

understanding and validating behavioral relationship in the banking sector (Jalan, 2002).

Therefore, the purpose of the current quantitative correlational study is to examine if

there is a relationship between the efficiency of corporate governance structure and the

performance of Saudi banks.

The rationale behind studying the effect of corporate governance structure on

bank performance may be a factor that helps investors to invest in a specific bank. If the

quality of bank performance is affected by the efficiency of corporate governance

structure, then the large blockholders need to monitor the management in order to reduce

the effect of the conflict of interests on the bank profitability. Furthermore, potential

long-term investors will tend to invest only in banks with higher profitability and more

efficient corporate governance structure.

Research Design

The current study attempted to identify any relationships that may exist between

the corporate governance structure’s efficiency and corporate performance of the Saudi

banks. The best research methodology to be used to obtain this knowledge is to conduct a

quantitative correlational study that examines the relationship between the efficiency of
 36

corporate governance structure and bank’s performance in Saudi Arabia. A two-step

quantitative research methodology was employed to accomplish the purpose of the

current study: DEA and panel regression (Jalan, 2002). DEA, a non-parametric

mathematical programming methodology (Yue, 1992) was used to evaluate the efficiency

of the corporate governance structure of the listed Saudi banks. The DEA program was

used in order to get efficiency scores of banks. Next, the efficiency scorers generated

from the DEA program were used as independent variables in a panel regression model to

explain bank’s performance (Lehmann et al., 2004).

Governance Efficiency Scores by DEA

The DEA is a non-parametric linear programming model. It was originally

proposed by Charnes et al. (1978). The model can be used in measuring the efficiency of

various banks using multiple inputs and multiple outputs (Al-Muharrami, 2007; Gattoufi

et al., 2004; Jemric & Vujcic, 2002; Kumar & Gulati, 2008; Lin, 2002; Ramanathan,

2007; Sanjeev, 2007; Sufian, 2007; Sufian & Abdul-Majid, 2007; Pasiouras, 2008; Wang

et al., 2005; Yalama & Coskun, 2007). The current study took into account the fact that

banks are operating by using some inputs in order to generate some outputs. Therefore,

the efficiency of the banks’ governance structure is measured with regard to how

efficiently they are able to use their inputs in order to generate their outputs. The

efficiency of the corporate governance structure is measured by the ratio of weighted

outputs to weighted inputs. To arrive at the optimal weights, a linear programming

equation for calculating the efficiency score hk for bank k is as follows (Lehmann et al.,

2004; Zhu, 2004):

 37

∑u y r rk
Max hk = r =1
m
u,v
∑v x
i =1
i ik

Subject to:
s

∑u y r rj
r =1
m
≤ 1, j = 1, 2, . . ., n,
∑v x
i =1
i ij

ur > 0 , r = 1, 2, . . ., s,

vi > 0 , i = 1, 2, . . ., m. (1)

Where ur and vi are the weights for the outputs, ( y1 , y 2 , . . . . y n ) and inputs

( x1 , x 2 , . . . . x n ), respectively.

Where j = 1, 2, . . ., n banks using i = 1, 2, . . ., m inputs x ij to generate r = 1, 2, . .

., s outputs y rj .

The objective of this equation is to maximize the relative efficiency score hk for

each bank individually subject to the constraint that no other bank attaching the same

weight has a higher score than one (Lehmann et al., 2004; Zhu, 2004). Therefore, the

governance efficiency scores are normalized from zero to one. This constraint is applied

for all inputs and outputs as well as for all weights. The ratio of the sum of outputs and

the sum of inputs is maximized which is known as a fractional program. Based on

Charnes et al. (1978), this fractional program is transformed into a linear program.

Maximizing the fraction from equation (1) can be accomplished by minimizing the
 38

dominator of the fraction and normalizing the nominator to one (Lehmann et al., 2004;

Zhu, 2004).

Min
μ
∑ vi x
,v i =1
ik

Subject to:

∑μr y
r =1
rk
=1

s m
−∑μ + 1 ∑ vi x ≥ 0 ,
ry
j = 1, 2, . . ., n,
rj ij
r =1 i =1

μr > 0 , r = 1, 2, . . ., s,

vi > 0 , i = 1, 2, . . ., m. (2)

The duality theory from linear programming suggests that there is a dual program

for each original linear program and the solutions are always equal (Gale, Kuhn, &

Tucker, 1951). The formulation applied for the estimation process determines the place of

a bank k in relation to the frontier line by solving the following dual program of equation

(2) (Lehmann et al., 2004; Zhu, 2004):

Max θk
θ ,h

Subject to:

n
θk y k − ∑λ j y ≤ 0 , r = 1, 2, . . ., s,
r rj
j =1

xi k − ∑ λ j xij ≥ 0 ,
i =1
i = 1, 2, . . ., m,

λj > 0, j = 1, 2, . . ., n. (3)
 39

The dual program shows that the bank’s relative efficiency is optimized,

depending on the situation in which the fundamental production function is rising and

becomes concave, and encloses all banks (Lehmann et al., 2004; Zhu, 2004). The relative

efficiency score of each bank is maximized separately.

The above linear equation is solved for all n banks. Meaning, the index k takes

values from one to n; and n equations must be solved. By recognizing the efficient bank

for each bank independently, the DEA program can identify the production frontier. A

bank is considered efficient if the efficiency score θ k is equal to one (Lehmann et al.,

2004; Zhu, 2004). Otherwise, the bank is considered inefficient and the efficiency score

shows the inefficiency level. The bank can improve its efficiency by either minimizing its

inputs or maximizing its outputs, which are under the management’s control. The value

θ k is called the efficiency score; it specifies the ratio by which all outputs of bank k are

increased; thus, that bank k is efficient (Lehmann et al., 2004; Zhu, 2004).

Each output of bank k has to be augmented by θ k to reach the level of the

reference bank on the efficiency frontier (Lehmann et al., 2004; Zhu, 2004). The

efficiency frontier is shaped as piece-wise linear and connects the group of best-practice

points, creating a convex production alternatives set (Lehmann et al., 2004; Zhu, 2004).

The reference bank is a hypothetical bank, generated as linear combination of fractions of

one or more observed input- output- combinations of banks on the frontier (Lehmann et

al., 2004; Zhu, 2004). The variable λ j represents the percentage of the j-th bank in the

reference set of bank k. Therefore, for every bank k in the sample, the DEA program can

determine whether or not a bank k is efficient and lies on the efficiency frontier. The
 40

obtained-value, θ k , considers the efficiency score for the j-th bank. The linear

programming equation is solved for each bank in the sample. The score of θ k = 1 specifies

the efficient reference bank. Other banks have a score of θ k < 1. Meaning, the efficiency

scores of other banks are calculated relative to the efficient reference bank that has a

score of θ k = 1 (Lehmann et al., 2004; Zhu, 2004).

Panel Regression

The efficiency scores generated from the DEA program were used as independent

variables in a panel regression model to explain bank performance (Lehmann et al.,

2004). Using panel regression, a non-parametric method and multivariate analysis may

assist in understanding and validating behavioral relationship in the banking sector (Jalan,

2002). Therefore, the current study is examining if there is a relationship between the

efficiency of corporate governance structure and the performance of the Saudi banks.

Variables

DEA variables

Following the work of Lehmann et al. (2004), in the DEA program, the corporate

governance structures were used as inputs while the corporate performance was used as

outputs. The corporate governance structures consist of two dimensions: identity of

owners and capital structure. Identity of owner represents the major owner of the bank –

blockholders who control at least 5% of the voting capital (Harjoto & Jo, 2008), so the

identity of blockholders is defined as (1) family, (2) government, (3) local, and (4)

foreigner investors. The capital structure is defined as the ratio of debt to total equity and

debt. Two control variables were added: capital intensity and firm size. The capital
 41

intensity, defined as total assets per employee, is added as an input in the DEA in order to

control possible variations in capital contribution per employee across banks (Lehmann et

al., 2004). The bank size is defined as log of total assets in order to control possible

variations in bank size (Lehmann et al., 2004).

The corporate performance consists of three dimensions: (a) investment, (b)

growth, and (c) profitability. Investment dimension is defined as the quarterly spending

on fixed assets divided by total assets. Growth dimension is defined as the percentage

change in the book value of total assets. Profitability dimension is defined as quarterly

return on assets (ROA). ROA is calculated by net income divided by total assets.

Dependent and independent variables

In the panel regression analysis, the dependent variable, bank performance, is

generally defined as the quarterly return on assets (ROA) and stock return, which is the

change in stock price from quarter to quarter. The independent variables are the

efficiency scores of corporate governance structure that were generated from the DEA

program. The bank size, defined as log of total assets, was added as a control independent

variable in the panel regression model (Lehmann et al., 2004; Mahajan & Chander,

2008).

Appropriateness of Design

The reason for choosing the quantitative methodology of research lies within the

nature of this research model, which depends upon “a description of trends or an

explanation of the relationship among variables” (Creswell, 2005, p. 45). The

characteristics of the quantitative research methodology provide a framework for the

current study that focused upon the use of a specific and narrow purpose by measuring
 42

observable data were collected from various sources, Reuters Knowledge database,

BANKSCOPE database, and financial reports of the nine listed banks in Saudi Arabia in

the period of 2004-2007.

DEA is also an appropriate model to be employed for the current study. This

model has been extensively used in measuring the efficiency of various organizations in

education, healthcare, manufacturing (Anderson, 1996), and banking (Al-Muharrami,

2007; Anderson, 1996; Jemric & Vujcic, 2002; Kumar & Gulati, 2008; Lin, 2002;

Ramanathan, 2007; Sanjeev, 2007; Sufian, 2007; Sufian & Abdul-Majid, 2007;

Pasiouras, 2008; Wang et al., 2005; Yalama & Coskun, 2007).

The advantage of employing the DEA model is that it uses actual sample data

(multi-inputs and multi-outputs) to measure the efficiency of each bank. Bauer et al.

(1998) argued that if the efficiency scores are linked to standard measures of

performance, authorities would be more confident that these scores are precise indicators

of performance and not just synthetic measures depending on specific assumptions.

Furthermore, the panel regression analysis is appropriate for the current study.

The panel data are cross-sectional variables and time-series variables. The panel data set

contains a series of observations per each of the nine subjects (banks). Each subject

includes 16 observations (one observation per each of the 16 quarters). Thus, the number

of observations for each variable is 144.

Research Question

In a quantitative study, the question should be presented in a narrow and specific

manner in order to obtain measurable and observable data on the variables that are being
 43

investigated (Creswell, 2005). The following research question was developed for the

investigation:

Research Question: To what extent would corporate governance structure matter

for banks’ performance?

Hypotheses

The following are the null and alternative hypotheses that were tested during the

current study.

H0: There is no relationship between an efficient corporate governance structure

and performance.

Ha: There is a relationship between an efficient corporate governance structure

and performance.

Population and Sampling Frame

The population of the current quantitative correlational study is adequate in terms

of number of subjects under investigation. In the first half of 2008, the banking sector

consists of 12 local commercial banks and 10 foreign commercial banks. The local banks

are Alinma Bank, Al Rajhi Bank, Arab National Bank, Bank Al Bilad, Bank Al Jazira,

Banque Saudi Fransi, National Commercial Bank, Riyad Bank, Samba Financial Group,

Saudi British Bank, Saudi Hollandi Bank, and Saudi Investment Bank. The foreign banks

are Bank Muscat, BNP Paribas, Deutsche Bank, Emirates Bank, Gulf International Bank,

J. P. Morgan Chase N.A., National Bank of Bahrain, National Bank of Kuwait, National

Bank of Pakistan, and State Bank of India.

In the first half of 2008, Saudi Arabia had only 11 commercial banks that were

listed and traded on the Saudi Stock Exchange. The current study excluded the non-listed
 44

banks, National Commercial Bank and all foreign commercial banks, and the new listed

banks, Alinma Bank and Bank Al Bilad. Newly listed banks were excluded because they

have recently been listed on the Saudi Stock Exchange and they did not have the required

data that cover the period 2004-2007.

Data availability characterized the sampling frame. The sample of the current

quantitative correlational study is only those commercial banks that are listed on the

Saudi Stock Exchange and have enough data during 2004-2007. Thus, nine banks were

included in the current study. These banks are Al Rajhi Bank, Arab National Bank, Bank

Al Jazira, Banque Saudi Fransi, Riyad Bank, Samba Financial Group, Saudi British

Bank, Saudi Hollandi Bank, and Saudi Investment Bank. The data covered a time frame

of 16 quarters for each bank. This provided 144 (9 x 16) observations for each variable

that is used in the panel regression analysis. Thus, the sample of 144 observations is

considered to be appropriate for the current study.

Geographic Location

The current quantitative correlational study examined the relationship between the

efficiency of corporate governance structure and bank performance. The current study

investigated this relationship using historical data that were collected from various

sources, such as Reuters Knowledge database, BANKSCOPE database, and financial

reports of local commercial banks listed and traded on the Saudi Stock Exchange.

Data Collection

Collecting data is a common element of attempting to solve problems and

satisfying curiosity (Hurst & Otis, 1996). The problem-solving cycle typically requires

researchers to find information in order to answer a question or to formulate a new

 45

question as data are gathered and analyzed. The act of collecting data can be

accomplished by the use of surveys, questionnaires, interviews, and archive. The current

study used historical archival data. The archival data were collected from various sources,

such as Reuters Knowledge database, BANKSCOPE database, and financial reports of

the nine listed banks on the Saudi Stock Exchange during the period of 2004-2007.

Reuters Knowledge database contains financial statements and stock prices of

corporations worldwide on a historical basis, published by Reuters. BANKSCOPE

database is a resource for financial and banking data of banks worldwide, published by

the Bureau van Dijk.

Compiling data includes working with various types of graphs and figures, which

leads to the use of mathematical tools, such as calculating frequencies, percentages, and

other inferential statistical formulas. Analyzing data is an exploratory process that allows

researchers to separate, inspect, compare and contrast, and infer meaningful patterns or

themes (Frechtling, Frierson, Hood, & Hughes, 2002). Frechtling et al. (2002) argued that

the data analysis includes many steps: (1) checking and preparing raw data for analysis,

(2) conducting preliminary analysis based on research assessment, (3) conducting

additional analysis based on the preliminary results, and (4) integrating and synthesizing

findings. The current study requires collecting data from various sources, Reuters

Knowledge database, BANKSCOPE database, and financial reports of the nine listed

banks in Saudi Arabia during the period of 2004-2007. These banks are Al Rajhi Bank,

Arab National Bank, Bank Al Jazira, Banque Saudi Fransi, Riyad Bank, Samba Financial

Group, Saudi British Bank, Saudi Hollandi Bank, and Saudi Investment Bank. The data

covered a time frame of 16 quarters. These sample criteria provided 144 observations for
 46

each variable that was used in the panel regression analysis. The raw data include net

income, total assets, total fixed assets, total debt, total stockholders’ equity, ownership

percentage, number of employees, stock price, and market capitalization.

Data Analysis

Once the raw data were collected, they were checked and prepared for analysis in

an Excel spreadsheet. Then this researcher conducted preliminary analysis based on the

research assessment. The raw data such as, net income, total assets, total fixed assets,

total debt, total stockholders’ equity, ownership percentage, number of employees, stock

price, and market capitalization were analyzed by the use of descriptive statistics.

Descriptive statistics include mean and standard deviation. Frequencies and percentages

were used to provide an overall picture of the sample subjects.

The next step was running the DEA program, using Efficiency Measurement

System (EMS), Version 1.3 [Scheel (2000)], in order to get efficiency scores of corporate

governance structures. Descriptive statistics in the form of central tendency and

variability were used to present the efficiency scores obtained from the DEA program for

all the banks within the sample. The efficiency scores were tested for internal and

external validity.

The inferential statistics that were used in the analysis of the panel regression

model was a t-test, using Gnu Regression, Econometrics, and Time-series Library

(GRETL) software. A t-test was conducted to examine the possible relationship between

efficiency scores and ROA as well as between efficiency scores and stock return. All

statistical tests were conducted using a .01 level of significance. Data were tested for

normality, Gaussian distribution, using Kolmogorov-Smirnov and Shapiro-Wilk tests

 47

(Mendes & Pala, 2003) to ensure that the data are normally distributed. Independent

variables were tested for multicollinearity by checking related statistics, such as variance

inflation factor (Freund & Littell, 2000). Correlation and normality tests were done by

SPSS software. Results of statistical analysis were presented in tables and figures.

Finally, findings were integrated and synthesized.

Validity and Reliability

DEA model has been extensively employed in the literature in measuring the

efficiency of various organizations in education, healthcare, manufacturing (Anderson,

1996), and banking (Al-Muharrami, 2007; Anderson, 1996; Jemric & Vujcic, 2002;

Kumar & Gulati, 2008; Lin, 2002; Ramanathan, 2007; Sanjeev, 2007; Sufian, 2007;

Sufian & Abdul-Majid, 2007; Pasiouras, 2008; Wang et al., 2005; Yalama & Coskun,

2007). The uniqueness of the DEA model is that it has two merits, which are useful for its

implementation. Yue (1992) argued that one merit is that:

[T]he DEA model is mathematically related to a multi-objective optimization

problem in which all inputs and outputs are defined as multiple objectives such

that all inputs are minimized and all outputs are maximized simultaneously under

the technology constraints. Thus, DEA-efficient DMUs [DMU means a decision-

making unit,] represent Pareto [Pareto refers to Vilfredo Pareto, an Italian

economist who framed the concept of optimality (McLure, 2000).] optimal

solutions to the multi-objective optimization problem, while the Pareto optimal

solution does not necessarily imply DEA efficiency (p. 33).

Yue (1992) argued that the other theoretical merit of the DEA model is that:
 48

DEA efficiency scores are independent of the units in which inputs and outputs

are measured, as long as these units are the same for all DMUs. These

characteristics make the DEA methodology highly flexible. The only constraint

set originally in the CCR model [CCR model refers to Charnes et al.’s (1978)

DEA model.] is that the values of inputs and outputs must be strictly positive.

This constraint, however, has been abandoned in the new additive DEA

formulation (p. 33).

Berger and Humphrey (1997) and Bauer et al. (1998) argued that efficient frontier

approaches, such as DEA model, seem to be superior compared to traditional financial

measures. Based on the above arguments, the current study assumed that the DEA model

is reliable enough to be implemented.

Internal and external validity can be evaluated by using sensitivity analysis to test

the robustness of DEA efficiency scores to changes in the methods and data used (Ganley

& Cubbin, 1992; Sufian, 2007). The efficiency scores obtained from the DEA model

were tested for internal validity and external validity by using Pearson correlation test

(Parkin & Hollingsworth, 1997). Internal validity test compares the efficiency scores

using different selections of inputs and outputs. External validity test compares the

consistency of the efficiency scores over time.

Summary

Chapter 3 described the research methodology and design that was applied to the

current study. The current quantitative correlational research methodology employed a

panel regression approach to establish any relationship between the efficiency of

corporate governance structure and corporate performance. The current study relied upon
 49

the data that were collected to explain the occurrence of that relationship. The inferential

statistics that were used in the analysis of the panel regression analysis was a t-test. The

current quantitative study provided a statistical analysis of the efficiency scores of

corporate governance structure provided by the DEA and a statistical analysis of the

relationship between efficiency scores and corporate performance, ROA and stock return.

The efficiency scores obtained from the DEA model were tested for internal and external

validity.
 50

CHAPTER 4: RESULTS

The purpose of the current descriptive quantitative correlational study was to

examine the relationship between the efficiency of corporate governance structure and

bank performance in Saudi Arabia. A two-step quantitative research design was

employed to accomplish the purpose of the current study: Data Envelopment Analysis

(DEA) and panel regression analysis. DEA is a non-parametric mathematical

programming methodology that can be used to evaluate the efficiency of a variety of

organizations using multiple inputs and multiple outputs (Yue, 1992). This methodology

can measure the efficiency of the corporate governance structure in an objective way. In

the DEA program, the corporate governance structures were used as inputs while the

corporate performance was used as outputs.

The corporate governance structures consist of two dimensions: identity of

owners and capital structure. Identity of owner represents the major owner of the bank –

blockholders who control at least 5% of the voting capital, so the identity of blockholders

is identified as (1) family, (2) government, (3) local, and (4) foreigner investors. The

capital structure is defined as the ratio of debt to total equity and debt. Two control

variables were added: capital intensity and firm size. The capital intensity, defined as

total assets per employee, is added as an input in the DEA in order to control possible

variations in capital contribution per employee across banks (Lehmann et al., 2004). The

bank size is defined as log of total assets in order to control possible variations in bank

size.

The corporate performance consists of three dimensions: (a) investment, (b)

growth, and (c) profitability. Investment dimension is defined as the quarterly spending
 51

on fixed assets divided by total assets. Growth dimension is defined as the percentage

change in the book value of total assets. Profitability dimension is defined as quarterly

return on assets (ROA). ROA is calculated as net income divided by total assets. Next,

the efficiency scores generated from the DEA program were used as independent

variables in a panel regression model to explain bank performance, the dependent

variable (Lehmann et al., 2004).

The independent variables of the regression model were defined as the efficiency

scores of corporate governance structure which are the blockholders: FAMILY,

GOVERNMENT, LOCAL, and FOREIGNER. FAMILY is defined as banks having

families as blockholders. GOVERNMENT is defined as banks having government as

blockholders. LOCAL is defined as banks having a group of local investors as

blockholders. FOREIGNER is defined as banks having foreign investors as blockholders.

The dependent variables were ROA and STOCK_RETURN. ROA is defined as the

return on total assets and measured by dividing the net income by total assets.

STOCK_RETURN is defined as the percentage changes in quarterly stock prices. The

current study employed historical data of nine listed Saudi banks for the period of 2004-

2007, 16 quarters. Microsoft® Excel 2003, Efficiency Measurement System (EMS),

Version 1.3 [Scheel (2000)], Gnu Regression, Econometrics, and Time-series Library

(GRETL), and SPSS software were used to analyze the data collected.

Descriptive statistics described the DEA inputs and outputs, and dependent and

independent variables of the regression model. Frequencies and percentages were used to

provide an overall picture of the corporate governance structure and bank performance.

Descriptive statistics in the form of central tendency and variability were used to present
 52

efficiency scores of corporate governance structure of the banks. The inferential statistics

used in the analysis of the data is a t-test. The t-tests were conducted to examine the

relationship between the efficiency scores of each blockholders’ identity and performance

variables, ROA and stock return. All statistical tests were conducted using a .01 level of

significance.

Chapter 4 is organized as follows. The first section describes the data collection

process. The next major section describes data analysis preparation: (a) the data entry

process; (b) treatment of missing data; and (c) syntactical adjustments of preliminary data

tables. The next section describes the data analysis preparation. The presentation of

results continues with a section describing the sample population.

The preliminary analysis that follows presents descriptive information related to

(a) the dependent variables, ROA and stock return; and (b) the independent variables,

efficiency scores of blockholders: FAMILY, GOVERNMENT, LOCAL, and

FOREIGNER. The next major section, analyses of the research question and research

hypothesis, presents results based on the study’s research question and hypothesis. The

last section in chapter 4 is a summary that reviews key points related to the sample group.

The summary also reviews key points related to results concerning the research question.

The summary concludes by introducing chapter 5, which presents conclusions and

recommendations related to the current descriptive correlational quantitative study on the

relationship between the efficiency of corporate governance structures and bank

performance.
 53

Data Collection Process

Having received approval to conduct research from the University of Phoenix on

October 3, 2008 and with the approval from Reuters and Bureau van Dijk, the data

collection process began. The data set is a panel data sorted by periods, t = 1, 2, 3, …, T.

Figure 1 shows how the first column of the data file is organized. This data organization

allows the EMS program to measure the efficiency scores of all banks in each period

(Scheel, 2000).

BANK 1 T 1

BANK 2 T 1

BANK 9 T 1

BANK 1 T 2

BANK 9 T 2

BANK 1 T 3

BANK 1 T 16

BANK 9 T 16

Figure 1. Panel Data of Data Envelopment Analysis (DEA)

The data were collected from various sources: Reuters Knowledge,

BANKSCOPE databases, and the annual financial reports. The financial data including:

net income, fixed assets, total assets, total debt, total equity, and stock prices were
 54

collected from the Reuters Knowledge database. The ownership percentage of

blockholders and number of employees were collected from BANKSCOPE database. The

initial intention was to collect data starting from 2001 in quarterly basis. However,

because of missing data in many years before 2004, the collected data ended up with four

years starting from 2004. The raw data and clean data were organized and stored in Excel

sheets. The Excel sheets were protected by a password then were burned to a CD which

was stored in a locked container.

Descriptive Sample Statistics

Table 1 presents summary statistics of the bank variables for the groups of banks

as classified by the identity of their blockholders. More than two third of the banks can be

identified as foreigner owned or controlled banks. They had the highest stock return,

growth, and the second highest capital structure ratios compared to other groups. One

explanation may be a selection effect that foreigner investors only invest in high

profitable banks. They had also the lowest number of employees compared to other

groups. The family owned banks had zero debt; however, they had the highest ROA ratio

compared to other groups. Having the lowest debt ratio indicates the policy of these

banks by restricting the influence of third parties like creditors. Local private owned

banks had the highest stock return ratio, the second highest ROA ratio, the second highest

growth ratio, and the highest number of employees compared to other groups.

The government owned banks had the highest debt ratio compared to other

groups. They had the lowest ROA and stock return ratios compared to other groups. This

may be explained by the fact that banks and holdings as blockholders try to increase their

own benefits (Lehmann et al., 2004).

 55

Table 1

Summary of Statistics: Sample of Nine Banks, 2004-2007

Blockholders’ Identity

ALL BLOCK FAMILY GOVERNMENT LOCAL FOREIGNER

Number of Banks 9 2 2 3 7

ROA

Mean 0.04 0.04 0.03 0.04 0.04

STDEV 0.02 0.02 0.01 0.01 0.02

Stock Return

Mean 0.10 0.09 0.08 0.10 0.10

STDEV 0.23 0.25 0.21 0.25 0.22

Investment Ratio

Mean 0.01 0.01 0.01 0.01 0.01

STDEV 0.01 0.01 0.01 0.01 0.01

Bank Growth

Mean 0.04 0.04 0.04 0.04 0.04

STDEV 0.05 0.03 0.05 0.05 0.06

Capital Structure

Mean 0.07 0.00 0.10 0.06 0.08

STDEV 0.09 0.00 0.08 0.08 0.10

Employment

Mean 2,553 3,510 3,445 3,516 1,878

STDEV 1,531 2,206 836 2,125 861

 56

Results from DEA Analysis

Table 2 presents distributional information on the calculated efficiency scores

from five estimations. Although the number of efficient units is determined by the size of

the sample, their number varies across the various identities of blockholders. For

instance, in the FAMILY group, 2 of 9 banks operated on the efficiency frontier, yielding

efficiency score of one. The remaining banks had chosen their input-output combination

inefficiently relative to the banks on the efficiency frontier. The lowest average efficiency

scores were found in the groups of banks owned by FOREIGNER and LOCAL.

Table 2

Summary of Statistics: DEA Efficiency Scores for Nine Banks per Ownership Group,

2004-2007

Blockholders’ Identity

ALL_ BLOCK FAMILY GOVERNMENT LOCAL FOREIGNER

Number of Banks 9 2 2 3 7

No. of Observations 144 32 32 48 112

Efficiency Scores

Mean 0.33 0.87 0.72 0.61 0.26

STDEV 0.20 0.07 0.08 0.13 0.15

MAX 1.00 1.00 1.00 1.00 1.00

MIN 0.10 0.68 0.55 0.32 0.10

When using all groups of blockholders as inputs in one model, the second lowest

average efficiency scores and the highest standard deviations were found in

ALL_BLOCK group. The highest share of efficient banks was found for the group of
 57

banks controlled by FAMILY and GOVERNMENT. These groups also had the lowest

standard deviations. Figure 2 shows the distribution of the efficiency scores of FAMILY,

GOVERNMENT, LOCAL, and FOREIGNER groups. The statistics reflected that

FAMILY and GOVERNMENT groups had the highest efficiency scores compared to

other blockholders. Figure 2 shows that the lowest efficiency scores are found in

FOREIGNER group.

FAMILY GOVERNMENT

LOCAL FOREIGNER

Figure 2. Distribution of Efficiency Scores of FAMILY, GOVERNMENT, LOCAL, and

FOREIGNER Groups
 58

Table 3 shows the results of the DEA efficiency scores for different years

independently from the various identities of blockholders. The consistency of the

efficiency scores over time supported the external validity. When using all groups of

blockholders in one model, the highest average efficiency scores of ALL_BLOCK were

found in 2006. The lowest average efficiency scores of ALL_BLOCK group were found

in 2007. The distribution of the efficiency scores of ALL_BLOCK from 2004 to 2007 is

illustrated in Figure 3. The highest average efficiency scores of FAMILY group were

found in 2007. The highest average efficiency scores of GOVERNMENT group were

found in 2005. The highest average efficiency scores of LOCAL group were found in

2006. The highest average efficiency scores of FOREIGNER group were found in 2005.

Table 3

Summary of Statistics: DEA Efficiency Scores for Nine Banks per Year, 2004-2007

Year

2004 2005 2006 2007

ALL_BLOCK

Mean 0.42 0.40 0.50 0.34

STDEV 0.12 0.19 0.27 0.24

MAX 1.00 1.00 1.00 1.00

MIN 0.29 0.18 0.17 0.12

FAMILY

Mean 0.76 0.83 0.86 0.88

STDEV 0.10 0.07 0.11 0.08

MAX 1.00 1.00 1.00 1.00

MIN 0.69 0.76 0.74 0.80

 59

Table 3 (Continued)

Year

2004 2005 2006 2007

GOVERNMENT

Mean 0.67 0.74 0.63 0.64

STDEV 0.14 0.13 0.16 0.15

MAX 1.00 1.00 1.00 1.00

MIN 0.60 0.60 0.51 0.56

LOCAL

Mean 0.67 0.57 0.79 0.75

STDEV 0.11 0.18 0.12 0.19

MAX 1.00 1.00 1.00 1.00

MIN 0.55 0.30 0.62 0.40

FOREIGNER

Mean 0.41 0.47 0.42 0.29

STDEV 0.13 0.23 0.23 0.22

MAX 1.00 1.00 1.00 1.00

MIN 0.29 0.24 0.17 0.13

Regression Analysis

Since the DEA effeciency scores are deterministic, they were used as regressors

in a panel regression analysis of bank performance, ROA and STOCK_RETURN. The

panel data organized as seen in Figure 4, the first column of the data file was organized

starting with the observations of each bank in all periods, t = 1, 2, . . , 16. The current

study proposed that the more efficient banks (i.e., those with higher effeciency scores)
 60

have higher performance. In line with most empirical studies of bank performance, the

ROA was used as a meaure of the market value from the production of the outputs.

STOCK_RETURN was used to measure the reaction of investors in how they evaluate

the efficient banks.

Year 2004 Year 2005

Year 2006 Year 2007

Figure 3. Distribution of Efficiency Scores of ALL_BLOCK from 2004 to 2007

The models to be estimated are as follows:

ROAit = α + β 1 E jit + β 2 Size it + eit , and

STOCK _ RETURN it = α + β 1 E jit + β 2 Size it + eit .

 61

Where ROA is the return on total assets, STOCK_RETURN is the quarterly change in

stock price, and E denotes the DEA effeciency scores of banks according to their

blockholders groups j = 1,…, 5 (i.e., ALL_BLOCK, FAMILY,

GOVERNMENT,LOCAL, and FOREIGNER, respectively). Size is bank size which is

added in order to control any possible variations in bank size (Mahajan & Chander, 2008;

Nippani, Vinjamury, & Bathala, 2008; Sanjeev, 2007). The subscripts, i = 1,…., 9 and t =

1,….,16 identify banks and periods, respectively. The regression error is e.

BANK 1 T 1

BANK 1 T 2

BANK 1 T 16

BANK 2 T 1

BANK 2 T 16

BANK 3 T 1

BANK 3 T 16

BANK 9 T 1

BANK 9 T 16

Figure 4. Panel Data of Regression

 62

The dependent and independent variables were tested for normality by applying

Kolmogorov-Smirnov and Shapiro-Wilk tets (Mendes & Pala, 2003) (see Figures 5-12).

All variables were significantly normaly distributed except FAMILY and

STOCK_RETURN.

Figure 5. Histogram and Normal Distribution Curve of ALL_BLOCK Efficiency Scores

Figure 6. Histogram and Normal Distribution Curve of FAMILY Efficiency Scores

 63

Figure 7. Histogram and Normal Distribution Curve of GOVERNMENT Efficiency

Scores

Figure 8. Histogram and Normal Distribution Curve of LOCAL Efficiency Scores

 64

Figure 9. Histogram and Normal Distribution Curve of FOREIGNER Efficiency Scores

Figure 10. Histogram and Normal Distribution Curve of Bank Size

 65

Figure 11. Histogram and Normal Distribution Curve of Return on Assets

Figure 12. Histogram and Normal Distribution Curve of STOCK_RETURN

 66

Table 4 summarizes the panel regression results of dependent variable, ROA,

using two different models. One model is with bank size effect and the other one is

without size effect. The two regression models vary in their specifications and may,

therefore, be interpreted as a robustness check of the findings. The results reflected that

the efficiency scores of ALL_BLOCK, FAMILY, and FOREIGNER groups were highly

significant in both estimation methods also showed a positive coefficient sign. However,

the results reflected that the efficiency scores of GOVERNMENT group were

insignificant in both estimation methods. The efficiency scores of LOCAL group were

insignificant in the estimation method with size effect, but they were significant in the

estimation method without size effect. All estimates shown were robust to

heteroskedasticity (White’s test). Independent variables were free from collinearity by

checking related statistics, such as variance inflation factor (Freund & Littell, 2000).

The underlying assumption that efficiency is a major source of ROA may be

indicated by the results. Even though the descriptive statistics provided variation of the

efficiency scores within the various blockholder groups, the results of ALL_BLOCK,

FAMILY, and FOREIGNER groups were clear and robust in both estimation methods. In

case, management could misuse its discretion and over invest in nonproductive assets or

bank growth; and therefore, increase efficiency scores, someone could expect a negative

effect of the efficiency scores on ROA. However, the results indicated that higher

efficiency scores are correlated with higher ROA. Therefore, the misuse of management

might be reduced by blockholders, as seen in ALL_BLOCK, FAMILY, and

FORIEGNER. If blockholders have a negative influence on banks, the efficiency scores

are lower; however, this was not the case in GOVERNMENT group.
 67

Table 4

Panel Regression Estimates (Weighted Least Square Model) of Return on Assets (ROA)

Dependent

variable: ROA Explanatory Variables

ALL_ BLOCK FAMILY GOVERNMENT LOCAL FOREIGNER

Observations 144 32 32 48 112

Size Effect

Coefficient 0.03 0.05 0.02 -0.00 0.04

t- test 4.61 5.39 1.83 -0.28 3.55

Significance p < .001 p < .001 p = .08 p = .78 p < .001

Standard error 0.01 0.01 0.01 0.01 0.01

Bank Size

Coefficient 0.01 0.06 0.05 0.03 0.01

t- test 2.82 13.25 4.54 4.13 1.94

Significance p < .01 p < .001 p < .001 p < .001 p = .06

Standard error 0.01 0.01 0.01 0.01 0.00

Model Fitness

Adjusted R2 0.23 0.86 0.40 0.24 0.16

F- test 21.13 93.89 11.54 8.58 11.37

Significance p < .001 p < .001 p < .001 p < .001 p < .001

Standard error 1.50 1.32 1.76 1.72 1.77

No Size Effect

Coefficient 0.05 0.10 - 0.00 0.04 0.06

t- test 11.17 3.73 - 0.12 4.26 4.33

Significance p < .001 p < .001 p = .90 p < .001 p < .001

Standard error 0.01 0.03 0.02 0.01 0.01

 68

Despite the GOVERNMENT group showed the second highest average efficiency

scores, they were insignificant in ROA regression. However, the government owned

banks had the lowest ROA and stock return ratios. This gives an indication that banks

which are dominated by GOVERNMENT ownership are managed and controlled

inefficiently. The results of the panel regression were consistent with Pearson correlation,

(see Table 5). The coefficients on bank size were significant at .01 level for all

blockholder groups except FOREIGNER group.

Table 6 summarizes the panel regression results of dependent variable,

STOCK_RETURN, using two different models. The two regression models vary in their

specifications and may, therefore, be interpreted as a robustness check of the findings.

Table 5

Pearson Correlation between Variables

ALL_BLOCK FAMILY GOVERNMENT LOCAL FOREIGNER ROA STOCK_RETURN

ALL_BLOCK 1.00 -.23 .02 .03 -.04 .48 .02

Sig (2-tailed) p = .21 p = .93 p = .66 p = .66 p < .001 p = .83
FAMILY -.23 1.00 -.28 -.17 -.05 .38 .13
Sig (2-tailed) p = .21 p = .12 p = .36 p = .78 p < .05 p = .47
GOVERNMENT .02 -.28 1.00 -.22 -.28 -.06 .17
Sig (2-tailed) p = .93 p = .12 p = .23 p = .12 p = .76 p = .35
LOCAL .03 -.17 -.22 1.00 .19 .29 .01
Sig (2-tailed) p = .84 p = .36 p = .23 p = .19 p = .05 p = .94
FOREIGNER -.04 -.05 -.28 .19 1.00 .64 .03
Sig (2-tailed) p = .66 p = .77 p = .12 p = .19 p< .001 p = .77
ROA .48 .38 -.06 .29 .64 1.00 -.24
Sig (2-tailed) p < .001 p < .05 p = .761 p = .05 p < .001 p < .001
STOCK_RETURN .02 .13 .17 .01 .03 -.24 1.00
Sig (2-tailed) p = .83 p = .47 p = .35 p = .94 p = .77 p< .001
 69

Table 6

Panel Regression Estimates (Weighted Least Square Model) of STOCK_RETURN

Dependent variable:

STOCK_RETURN Explanatory Variables

ALL_ BLOCK FAMILY GOVERNMENT LOCAL FOREIGNER

Observations 144 32 32 48 112

Size Effect

Coefficient 0.02 1.34 0.10 0.43 0.00

t- test 0.17 1.72 0.14 1.17 0.01

Significance p = .86 p = .10 p = .89 p = .25 p = .99

Standard error 0.10 0.78 0.70 0.36 0.17

Bank Size

Coefficient -0.10 0.30 -0.36 -0.04 -0.10

t- test -1.28 1.28 -0.99 -0.19 -1.18

Significance p = .20 p = .21 p = .33 p = .85 p = .24

Standard error 0.08 0.24 0.37 0.21 0.08

Model Fitness

Adjusted R2 -0.00 0.10 -0.03 0.04 0.00

F- test 0.82 2.82 0.49 0.10 0.78

Significance p = .44 p = .08 p = .62 p = .38 p = .46

Standard error 1.89 2.22 1.67 2.05 1.90

No Size Effect

Coefficient 0.02 0.45 0.41 0.05 0.06

t- test 0.22 0.74 0.61 0.15 0.42

Significance p = .82 p = .47 p = .54 p = .88 p = .68

Standard error 0.11 0.60 0.67 0.31 0.15

 70

The results reflected that the efficiency scores of all groups, ALL_BLOCK,

FAMILY, GOVERNMENT, LOCAL, and FOREIGNER were insignificant in both

estimation methods. All blockholder groups showed a positive coefficient sign in both

estimation methods. These findings were in line with the works of Caton and Goh (2008)

and Bauer et al. (2004) who found that an efficient corporate governance structure

positively affected stock return; however, the results of the current study were not

significant. One possible explanation of these results is that the Saudi stock market is

immature and inefficient. Based on Tadawul’s statistics of January 2008, 92% of trading

volume was done by individual investors. A dominated market of individual investors

gives an indication that individual investors do not trade based on value. They are

basically speculators, not investors. The coefficients on bank size were insignificant for

all ownership groups. All estimates shown were robust to heteroskedasticity (White’s

test).

Summary

Chapter 4 presented the results of the corporate governance study conducted

among the convenience sample taken from 11 Saudi banks. Data collected from Reuters

Knowledge and BANKSCOPE databases was synthesized and presented in this chapter.

More than two third of the banks can be identified as foreigner owned or controlled

banks. They had the highest stock return, growth, and the second highest capital structure

ratios compared to other groups. Local private owned banks had the highest stock return

ratio, second highest ROA ratio, the second highest growth ratio, and the highest number

of employees compared to other groups.

 71

The lowest average efficiency scores were found in the groups of banks owned by

FOREIGNER and LOCAL. The family owned banks had zero debt; however, they had

the highest ROA ratio compared to other groups. The government owned banks had the

highest debt ratio compared to other groups. They had the lowest ROA and stock return

ratios compared to other groups. The highest share of efficient banks was found for the

group of banks controlled by FAMILY and GOVERNMENT. When using all groups of

blockholders as inputs in one model, the second lowest average efficiency scores and the

highest standard deviations were found in ALL_BLOCK group.

In ROA regression, the results reflect that the efficiency scores of ALL_BLOCK,

FAMILY, and FOREIGNER groups were positively significant. However, the results

indicated that the efficiency scores of GOVERNMENT were insignificant. In

STOCK_RETURN regression, the results reflected that the efficiency scores of all

groups, ALL_BLOCK, FAMILY, GOVERNMENT, LOCAL, and FOREIGNER were

insignificant.

Chapter 5 summarizes the current study. The discussion topics are presented in

the following format: (a) interpretation of the data results, (b) inferences about the

important findings, (c) results of the analysis to leadership implications, (d)

recommendations for action by shareholders, and (e) recommendations for future

research.
 72

CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS

The purpose of the current descriptive quantitative correlational study was to

examine the relationship between the efficiency of corporate governance structure and

bank performance in Saudi Arabia. A two-step quantitative research design was

employed to accomplish the purpose of the current study: Data Envelopment Analysis

(DEA) and panel regression analysis. The efficiency scores were firstly regressed with

ROA and secondly regressed with stock return.

The current study attempted to increase investors’ awareness about the

importance of corporate governance concept in Saudi stock market. Banks had been

chosen as a sample for the current study to represent the stock market because they have

well-defined corporate governance structures.

Regulators, business leaders, creditors, and investors could benefit from the

findings presented in the current study. Regulators, the Saudi Stock Exchange and CMA

focus on establishing a corporate governance code that can regulate listed companies in

Saudi Arabia. Since the corporate governance concept is new in Saudi Arabia, few

research studies have so far investigated whether the corporate governance structure is

efficient in Saudi banks or not. The rationale behind studying the effect of corporate

governance structure on banks’ performance may be a factor in helping investors to

invest in a specific bank. If the quality of bank performance is affected by the efficiency

of corporate governance structure, then the blockholders need to monitor the management

in order to reduce the effect of the conflict of interests resulting from agency costs on the

bank profitability. Furthermore, potential long-term investors will invest only in banks

with higher profitability and more efficient corporate governance structure. Creditors will
 73

also benefit from the results of the current study. The results can help them justifying

their decisions whether to funding particular banks or not.

The results of the current study added to prior quantitative research studies related

to corporate governance structure and corporate performance, particularly the Saudi case.

The current study added to the existing body of literature in the areas of corporate

governance, capital structure, and investment. The results of the current study are

anticipated to be of use in asset management business by providing the leadership with

essential information in selecting the right investment. The current study also contributed

to a better understanding of the corporate governance structure and its components.

The ability to create an efficient business environment, where investors can

invest, will assist business leaders in the market to increase the efficiency of their

organizations. The findings of the current study were in congruent with previous study

completed by Lehmann et al. (2004) that indicated higher efficiency scores are associated

with higher return on assets.

Interpretation of the Data Results

One hypothesis was formulated and tested for each panel regression. Descriptive

statistics were compiled within each blockholder group. Additionally, t-tests were applied

to examine whether the magnitude of the efficiency scores of each blockholder group is

statistically significant when they are regressed with ROA and stock return. The null

hypothesis stated that there is no relationship between an efficient corporate governance

structure and performance. In ROA panel regression, the null hypothesis is rejected in

ALL_BLOCK, FAMILY, and FOREIGNER groups at the significance level of .01.

Meaning, the alternative hypothesis is supported, i.e., there is a positive significant

 74

relationship between an efficient corporate governance structure and bank performance.

However, the null hypothesis is supported in GOVERNMENT and LOCAL groups. In

STOCK_RETURN panel regression, the null hypothesis is supported in all blockholder

groups. However, there is a positive relationship between efficiency scores and various

blockholder groups.

One research question was formulated: To what extent would corporate

governance structure matter for banks’ performance? The answer to the research question

was provided by the test of the null hypothesis. As indicated by the results of statistical

testing, there was a relationship between the efficiency of corporate governance structure

and bank performance. However, the relationship is significant only in the ROA panel

regression. The finding is consistent with previous study conducted by Lehmann et al.

(2004).

Inferences about the Important Findings

Leaders within the Saudi Stock Exchange and CMA environments focus on

establishing a corporate governance code that can regulate listed companies in Saudi

Arabia. Since the corporate governance concept is new in Saudi Arabia, few research

studies have so far investigated whether the corporate governance structure is efficient in

Saudi banks or not. The rationale behind studying the effect of corporate governance

structure on banks’ performance may be a factor in helping investors to invest in a

specific bank. If the quality of bank performance is affected by the efficiency of

corporate governance structure, then the blockholders need to monitor the management in

order to reduce the effect of the conflict of interests resulting from agency costs on the
 75

bank profitability. Furthermore, potential long-term investors will invest only in banks

with higher profitability and more efficient corporate governance structure.

Increasing investors’ awareness about the importance of the efficiency of

corporate governance can assist in decreasing the misuse and misbehavior of bank

management. If the efficiency of corporate governance structure is related to bank

performance, as suggested by the current study, then a variety of stakeholders, such as

business leaders, regulators, creditors, and investors, should have a vested interest in the

results and what the relationship means for public and professional. Providing an efficient

corporate governance structure that is conductive to increasing bank achievement and

success can positively affect various aspects of economic and workforce development,

which assists with the stabilization of the banking sector in Saudi Arabia. To survive and

thrive in the evolving competitive banking business arena within the country, banking

business leaders need to create conditions that will foster stakeholder internal and

external teambuilding, which includes engaging each individual financial institution’s

service and community.

Results of the Analysis to Leadership Implications

As detailed in chapter 1, the core of the agency theory is how to resolve conflicts

resulting from the separation of ownership and management control of corporate

resources (Fama & Jensen, 1983; Jensen, 1986). In the modern concept of the

corporation, common stockholders take little or no active participation in the

management of the firm. Instead, stockholders usually hire professional managers to

operate the firm in a manner consistent with the stockholders’ best interests. However,

giving managers the control over the resources of the firm gives them the opportunity to
 76

use the firm’s resources for their own interests, regardless of the effect on the firm’s

stockholders.

The separation of the activities of ownership and management and the presence of

informational asymmetry may cause conflict of interests. The manager’s self-interest

could lead to the misuse of bank resources, for instance, through investing in risky and

imprudent projects at the expense of the stakeholders who provide capital (Jensen &

Meckling, 1976; Shleifer & Vishny, 1986). Therefore, to control conflicts of interests and

reduce agency costs, various internal and external tools, known as corporate governance,

have been suggested.

The literature reviewed in chapter 2 supported the view that the agency theory

examines the relationship between stockholders and management. The relationship

between stockholders and management is one of the components of corporate governance

structure. Lehmann et al. (2004) examined if companies that have more efficient

governance structure have higher performance. Having an efficient corporate governance

structure would lead to better performance. Agency theory separates control function

from ownership. This relationship is important in building an efficient corporate

governance structure. Kole and Lehn (1999) found that agency theory predicts adapting

corporate governance structure.

A strong corporate governance structure would eliminate or at least reduce the

conflicts of interests between the stockholders and management. Kyereboah-Coleman et

al. (2006) argued that corporate governance structures influence corporate performance

of Ghanaian companies. Tricker (2000) has defined corporate governance as “the

exercise of power over corporate entities” (p. 403). Because of the separation between
 77

ownership and management control, the need for an efficient corporate governance

structure has become necessary. The corporate governance structure operates through two

agency relationships: between stockholders and management; and between employees

and management (Child & Rodrigues, 2004).

The main finding of the current study is that performance differences among

banks can be significantly explained by banks’ efficiency scores. The results of the

current study indicated that there was a strong relationship between the efficiency of

corporate governance structure and bank performance when using ROA as a performance

measure with one exception that GOVERNMENT and LOCAL ownership groups were

insignificant. However, when using stock return as a performance measure, there was a

weak positive relationship between the efficiency of corporate governance structure and

bank performance. The results of stock return regression were not in line with the results

of the ROA regression.

The mismatch results might be contributed for many reasons. First, the accounting

performance measures such as ROA can be controlled by the management; however, the

stock return is not under their control because they cannot control stock price. The stock

return reflects traders’ behavior. Second, Saudi stock market is immature and inefficient.

Third, most of the traders in the Saudi stock market are individuals. Meaning, most of the

investors are novices. They do not have the required investment experience and

knowledge that enables them to evaluate companies.

Regulator leaders must constantly evaluate how to improve the corporate

governance structures and how to educate investors. To meet the needs of the evolving

Saudi stock market, business leaders need to improve the efficiency of corporate
 78

governance structures of their organizations. They need to meet their social

responsibilities towards public in terms of educating investors and increasing awareness.

Investors’ demand for corporate social responsibilities and non financial information is

increasing (Holder-Webb, Cohen, Nath, & Wood, 2009).

Recommendations for Action by Stakeholders

Two recommendations for action by stakeholders are (a) to become more

involved in the development and implementation of corporate governance process to

foster the efficiency of corporate governance structures within Saudi stock market and (b)

become actively involved in promoting corporate governance initiatives to ensure

sustainable positive economic growth. Banking business leadership has an impact on and

is influenced by multiple stakeholder groups in the community, including local and

regional governmental regulators, creditors, blockholders, and media. Business leaders

who manage successful financial institutions will support and encourage growth and

development; and they will create efficient business environments where investors,

employees, creditors, and various regulators feel valued, welcome, and respected.

Building strong relationships in the community’s diverse populations and groups

is a necessary process for all business leaders to adhere. Without the support of multiple

stakeholders within the financial institution’s environment, any economic project will

fail, including a business leader’s commitment to the initiatives. Based on the concept of

the stakeholder theory dealing with the relations among the major groups, such as

employees, customers, suppliers, financiers, and community and other groups that may

affect the achievement of organizations’ objectives (Freeman & Philips, 2002),

 79

stakeholders should be involved in the development and implementation of corporate

governance process.

Conflicts of interest may exist among stakeholders such as managers,

shareholders, and creditors because the business decisions that maximize the welfare of

one of these groups frequently minimize the welfare of the others (Smith, 1990). The

presence of conflicts of interests among stakeholders is the main cause of having

inefficient corporate governance structures. A business leader’s ability to foster

communication with appropriate stakeholders in order to introduce a measureable

strategic plan with goals and timetables that all parties agree to execute is essential.

Financial institutional initiatives can fail when leaders underestimate the

difficulties associated with creating an efficient environment. The ability to maintain an

open stakeholder communication process can help developing corporate governance

structures , enhance bank performance, and increase awareness among investors. All

stakeholders need to feel a sense of ownership in the overall organizational mission. A

sense of stakeholder ownership drives business accountability, and accountability boosts

success.

Together, banking business leaders and other stakeholders must create leadership

teams focused on the efficiency of corporate governance structures that prepare Saudi

banks for the entry to the global economy. Redefining the role of the banking business

leadership in the area of corporate governance requires educated investors and regulators

to be reflective of their current leadership practices.

 80

Recommendations for Future Research

Recommendations for future research include a comparison between corporate

governance structures of banks in Saudi Arabia and corporate governance structures of

banks in other Gulf Cooperation Council (GCC) countries. The GCC countries have

similar political systems and banking systems. Another future research is examining the

efficiency of corporate governance structures for the entire stock market in Saudi Arabia.

Covering the entire population will provide more reliable and adequate information. As

discussed in the literature review in chapter 2, previous research studies that have

assessed the corporate governance structures have been completed within various

countries and organizations. The research results experienced by Lehmann et al. (2004)

are similar to the results of the current study.

The current study focused on the relationship between the efficiency of corporate

governance structure and bank performance. Future research should be conducted upon

the motivational factors of corporate governance that promote efficiency in relation to

corporate performance within the GCC region. Developing a survey instrument in order

to collect more data about the corporate governance structure, efficiency factors,

investors’ knowledge, and their interpretation of valuable investments will be

worthwhile. The question to be addressed is then: What single or a combination of

internal or external factor(s) influence the efficiency of corporate governance structure

and make investors aware about its important in their investment decisions?

Summary

Chapter 5 provided a more expansive description of the data analysis presented in

chapter 4. The chapter was organized by the following discussion topics: findings and
 81

analysis, implications, and recommendations. The following subtopics were addressed in

chapter 5: (a) interpretation of the data results, (b) inferences about the important

findings, (c) results of the analysis to leadership implications, (d) recommendations for

action by stakeholders, and (e) recommendations for future research.

Conclusion

In the current study, the null hypothesis was rejected, and it was established that

there is no relationship between an efficient corporate governance structure and

performance. Therefore, the alternative hypothesis is supported. The results reflected that

there was a strong relationship between the efficiency of corporate governance structure

and bank performance when using ROA as performance measure with one exception that

GOVERNMENT and LOCAL ownership groups were insignificant. Overall, the research

results experienced by Lehmann et al. (2004) are similar to the results of the current study

related to ROA regression. However, when using stock return as a performance measure,

there was a weak positive relationship between the efficiency of corporate governance

structure and bank performance. These findings are in line with the works of Caton and

Goh (2008) and Bauer et al. (2004) who found that an efficient corporate governance

structure positively affected stock return; however, the results of the current study were

not significant.

One of the priorities of banking business leaders is to focus upon the efficiency

factors that will allow banks to achieve excellence and quality in their corporate

governance structures. To enable change within the Saudi stock market, in particular

banking sector, regulators and business leaders need to evaluate and alleviate the difficult

and complex issues of corporate governance. To address the issue of providing an

 82

efficient corporate governance structure that is conducive to various stakeholders,

banking business leaders may need to consider the motivational factors and previous

corporate governance experience in order to improve the efficiency of their organizations.

 83

REFERENCES

Abor, J. (2005). The effect of capital structure on profitability: An empirical analysis of

listed firms in Ghana. Journal of Risk Finance (15265943), 6(5), 438-445.

Retrieved June 15, 2008, doi:10.1108/15265940510633505.

Al-Muharrami, S. (2007). Politics and productivity in GCC banking industry. The

Business Review, Cambridge, 9(1), 265-270. Retrieved May 26, 2008, from

ABI/INFORM Global database.

Anderson, T. (1996). DEA bibliography. Retrieved May 4, 2007 from

http://www.emp.pdx.edu/dea/deabib.html#Bibliography.

Bartelsman, E. J., & Doms, M. (2000). Understanding productivity: Lessons from

longitudinal micro data. Journal of Economic Literature, 38(3), 569-594.

Retrieved October 31, 2007, from ABI/INFORM Global database.

Bauer, P.W., & Berger, A.N., Ferrier, G.D., & Humphrey, D.B. (1998). Consistency

conditions for regulatory analysis of financial institutions: A comparison of

frontier efficiency methods. Journal of Economics and Business, 50(2), 85-114.

Bauer, R., Guenster, N., & Otten, R. (2004). Empirical evidence on corporate governance

in Europe: The effect on stock returns, firm value and performance. Journal of

Asset Management, 5(2), 91-104. Retrieved November 30, 2006, from the

Business Source Complete database.

Berger, A. N., & Humphrey, D.B. (1997). Efficiency of financial institutions:

International survey and directions for future research. European Journal of

Operational Research, 98(2), 175-212.

 84

Burlaka, M. (2006). Bank corporate governance: The emerging Ukrainian market

compared to international best practices. Fordham Journal of Corporate &

Financial Law, 11(4), 851-891. Retrieved October 12, 2006, from the Business

Source Complete database.

Carver, J. (2005). Now let’s really reform governance. Board Leadership, 2005(77), 5-7.

Retrieved October 22, 2006, from the Business Source Complete database.

Caton, G., & Goh, J. (2008). Corporate governance, shareholder rights, and shareholder

rights plans: Poison, placebo, or prescription? Journal of Financial &

Quantitative Analysis, 43(2), 381-400. Retrieved January 25, 2009, from Business

Source Complete database.

Charnes, A., Cooper, W.W., & Rhodes, E. (1978). Measuring the efficiency of decision

making units. European Journal of Operational Research, 2(6), 429-444.

Chew, D. H., (Ed.). (2003). The new corporate finance: Where theory meets practice.

New York: Irwin.

Child, J., & Rodrigues, S. (2004). Repairing the breach of trust in corporate governance.

Corporate Governance: An International Review, 12(2), 143-152. Retrieved

November 11, 2006, from the Business Source Complete database.

CMA. (2006). The code of corporate governance in the Kingdom of Saudi Arabia.

Retrieved November 30, 2006, from

http://www.cma.org.sa/cma_cms/upload_sec_content/dwfile277/governance_151

12006.pdf

Creswell, J. W. (2005). Educational research. Upper Saddle River: Prentice Hall.

 85

Dawson, S. (1984). The trend toward efficiency for less developed stock exchanges:

Hong Kong. Journal of Business Finance & Accounting, 11(2), 151-161.

Retrieved November 11, 2006, from the Business Source Complete database.

Demsetz, H., & Lehn, K. (1985). The structure of corporate ownership: Causes and

consequences. Journal of Political Economy, 93(6), 1155-1177. Retrieved

November 30, 2006, from the Business Source Complete database.

Eisenhardt, K. (1989). Agency theory: An assessment and review. Academy of

Management Review, 14(1), 57-74. Retrieved November 10, 2006, from the

Business Source Complete database.

Ezzamel, M., & Watson, R. (1993). Organizational form, ownership structure and

corporate performance: A contextual empirical analysis of UK companies. British

Journal of Management, 4(3), 161-176. Retrieved November 10, 2006, from the

Business Source Complete database.

Fama, E. F. (1978). The effects of a firm’s investment and financing on the welfare of its

security holders. American Economic Review, 68(3), 272-284. Retrieved

November 23, 2006, from the EBSCOhost database.

Fama, E. F. (1980). Agency problems and the theory of the firm. Journal of Political

Economy, 88(2), 288-307. Retrieved November 10, 2006, from the Business

Source Complete database.

Fama, E. F. (1995). Random walks in stock market prices. Financial Analysts

Journal, 51(1), 75-80. Retrieved June 7, 2008, from ABI/INFORM

Global database.
 86

Fama, E. F., & Jensen, M.C. (1983). Separation of ownership and control. Journal of

Law and Economics, 26(June), 301-325.

Fernández, C., & Gómez-Ansón, S. (2005). Does ownership structure affect firm

performance? Corporate Ownership & Control, 3(2), 75-89. Retrieved May 10,

2008, from Business Source Complete database.

Frechtling, J., Frierson, H., Hood, S., & Hughes, G. (2002). The 2002 user friendly

handbook for project evaluations. Retrieved May 18, 2008, from

http://www.nsf.gov/pubs/2002/nsf02057/nsf02057.pdf

Freeman, R. E., & Philips, R. A. (2002). Stakeholder theory: A libertarian defense.

Business Ethics Quarterly, 12(3), 331-349.

Freund, R. J., & Littell, R. C. (2000). SAS system for regression, (3rd ed). Cary, NC: SAS

Institute.

Gale, D., Kuhn, H.W., & Tucker, A.W. (1951). Linear programming and the theory of

games. In T. C., Koopmans (ed.), Activity analysis of production and allocation

(pp. 317-329). Wiley: New York, NY.

Ganley, J. A., & Cubbin, J. S. (1992). Public sector efficiency measurement: Applications

of data envelopment analysis, New York: North Holland.

Gattoufi, S., Oral, M., & Reisman, A. (2004). Data envelopment analysis literature: A

bibliography update (1951-2003). Socio-Economic Planning Sciences, 38(2-3),

159-229.

Gomez-Mejia, L., Wiseman, R., & Dykes, B. (2005). Agency problems in diverse

contexts: A global perspective. Journal of Management Studies, 42(7), 1507-

 87

1517. Retrieved November 10, 2006, from the Business Source Complete

database.

Gunn, B. (2004). Does power corrupt? Strategic Finance, 86(2), 9-10. Retrieved May 25,

2008, from ABI/INFORM Global database.

Haniffa, R., & Hudaib, M. (2006). Corporate governance structure and performance of

Malaysian listed companies. Journal of Business Finance & Accounting, 33(7/8),

1034-1062. Retrieved June 15, 2008, doi:10.1111/j.1468-5957.2006.00594.x

Hanousek, J., Kočenda, E., & Svejnar, J. (2007). Origin and concentration. Economics of

Transition, 15(1), 1-31. Retrieved June 15, 2008, doi:10.1111/j.1468-

0351.2007.00278.x

Harjoto, M., & Jo, H. (2008). Board leadership and firm performance. Journal of

International Business & Economics, 8(3), 143-154. Retrieved December 21,

2008, from Business Source Complete database.

Heffes, E. M. (2003). Restoring corporate integrity and public trust. Financial Executive,

19(4) 18-19. Retrieved October 21, 2006, from the EBSCOhost database.

Holder-Webb, L., Cohen, J., Nath, L., & Wood, D. (2009, February 15). The supply of

corporate social responsibility disclosures among U.S. firms. Journal of Business

Ethics, 84(4), 497-527. Retrieved January 25, 2009, doi:10.1007/s10551-008-

9721-4

Holderness, C. G. (2003). A survey of blockholders and corporate control. Economic

Policy review, 9(1). Retrieved on October 31, 2007 from

http://www.ny.frb.org/research/epr/03v09n1/0304hold.pdf
 88

Holderness, C. G., & Sheehan, D. P. (1988). The role of majority stockholders in publicly

held corporations: An exploratory analysis. Journal of Financial Economics, 20,

317-346.

Hurst, C. O., & Otis, R. (1996). Data gathering and analyzing. Carol Hurst’s Children’s

Literature Site. Retrieved June 16, 2008, from

http://www.carolhurst.com/subjects/math/datagather.html

Jalan, B. (2002). Indian banking and finance: Managing new challenges. A paper

presented at the Banking Economists’ Conference, Kolkata, on January 14, 2002.

Retrieved May 4, 2007, from http://www.bimaljalan.com/speech140102.html

Jarrett, J., & Kyper, E. (2006). Capital market efficiency and the predictability of daily

returns. Applied Economics, 38(6), 631-636. Retrieved June 15, 2008,

doi:10.1080/00036840600581422

Jemric, I., & Vujcic, B. (2002). Efficiency of banks in Croatia: A DEA

approach. Comparative Economic Studies, 44(2/3), 169-193. Retrieved May 24,

2008, from ABI/INFORM Global database.

Jensen, M. C. (1986). Agency cost of free cash flow, corporate finance and takeovers.

American Economic Review Papers and Proceedings, 76, 323-329.

Jensen, M. C., & Meckling, W. H. (1976). Theory of firm: Managerial behavior, agency

costs, and ownership structure. Journal of Financial Economics, 3(4), 305-364.

Joh, S. W. (2003). Corporate governance and firm profitability: Evidence from Korea

before the economic crisis. Journal of Financial Economics, 68(2), 287-322.

Jones, G. R. (2004). Organizational Theory, Design, and Change (4th ed.). Upper Saddle

River, NJ: Prentice Hall.

 89

Karathanassis, G. A., & Drakos, A. A. (2004). A note on equity ownership and corporate

value in Greece. Managerial & Decision Economics, 25(8), 537-547. Retrieved

November 30, 2006, from ABI/INFORM Global database.

Kawaura, A. (2004). Deregulation and governance: plight of Japanese banks in the 1990s.

Applied Economics, 36(5), 479-484. Retrieved November 29, 2006, from the

Business Source Complete database.

Khanchel El Mehdi, I. (2007). Empirical evidence on corporate governance and corporate

performance in Tunisia. Corporate Governance: An International Review, 15(6),

1429-1441. Retrieved January 23, 2009, doi:10.1111/j.1467-8683.2007.00655.x

Koehn, J. L., & Vecchio, S. C. D. (2004). Ripple effects of the Sarbanes-Oxley Act. CPA

Journal, 74(2), 36-40. Retrieved October 23, 2006, from the EBSCOhost

database.

Kole, S. R., & Lehn, K. M. (1999). Deregulation and the adaptation of governance

structure: The case of the U.S. airline industry. Journal of Financial Economics,

52(1), 79-117.

Krafft, J., & Ravix, J. (2005). The governance of innovative firms: An evolutionary

perspective. Economics of Innovation & New Technology, 14(3), 125-147.

Retrieved October 10, 2006, from the Business Source Complete database.

Krivogorsky, V. (2006). Ownership, board structure, and performance in continental

Europe. International Journal of Accounting, 41(2), 176-197. Retrieved

December 03, 2006, from the Business Source Complete database.

Kumar, M., Bhole, L. M., & Saudagaran, S. M. (2003). Interment-cash flow sensitivity

and access to foreign capital overseas listed Indian firms. Vikalpa: The Journal
 90

for Decision Makers, 28(1), 47-59. Retrieved December 01, 2006, from the

Business Source Complete database.

Kumar, S., & Gulati, R. (2008). The impact of size and group affiliation on technical

efficiency of Indian public sector banks: An empirical investigation. ICFAI

Journal of Bank Management, 7(4), 18-40. Retrieved December 22, 2008, from

Business Source Complete database.

Kyereboah-Coleman, A., Adjasi, C., & Abor, J. (2006). Corporate governance and

performance: Evidence from Ghanaian listed companies. Corporate Ownership &

Control, 4(2), 123-132. Retrieved May 10, 2008, from Business Source Complete

database.

Leech, D., & Leahy, J. (1991, November). Ownership structure, control type

classifications and the performance of large British companies. Economic

Journal, 101(409), 1418-1437. Retrieved May 12, 2008, from Business Source

Complete database.

Lehmann, E., Warning, S., & Weigand, J. (2004). Governance structures,

multidimensional efficiency and firm profitability. Journal of Management &

Governance, 8(3), 279-304. Retrieved May 11, 2006, from the Business Source

Complete database.

Lennox, C. (2005). Management ownership and audit firm size. Contemporary

Accounting Research, 22(1), 205-227. Retrieved November 10, 2006, from the

Business Source Complete database.

 91

Li, M., & Simerly, R. (1998). The moderating effect of environmental dynamism on the

ownership and performance relationship. Strategic Management Journal, 19(2),

169. Retrieved May 11, 2008, from Business Source Complete database.

Lin, P. W. (2002). The efficiency of commercial bank mergers in Taiwan: An

envelopment analysis. International Journal of Management, 19(2), 334-342.

Retrieved May 26, 2008, from ABI/INFORM Global database.

Lo, S. F., & Sheu, H. J. (2007). Is corporate sustainability a value-increasing strategy for

business? Corporate Governance: An International Review, 15(2), 345-358.

Mahajan, P., & Chander, S. (2008). Determinants of timeliness of corporate disclosure of

selected companies in India. ICFAI Journal of Accounting Research, 7(4), 28-63.

Retrieved December 23, 2008, from Business Source Complete database.

Mahoney, P. (2006). Mandatory vs. contractual disclosure in securities markets: Evidence

from the 1930s. American Law & Economics Association Papers. Retrieved

December 01, 2006, from the Business Source Complete database.

McConnell, J. J., & Servaes, H. (1990). Additional evidence on equity ownership and

corporate value. Journal of Financial Economics, 27, 595-612.

McDonnell, P. (2004). The PCAOB and the future of oversight. Journal of Accountancy,

198(6), 98-101. Retrieved October 22, 2006, from the Business Source Complete

database.

McLure, M. (2000). The Pareto-Scorza polemic on collective economic welfare.

Australian Economic Papers, 39(3), 347. Retrieved May 29, 2008, from Business

Source Complete database.

 92

Mendes, M., & Pala, A. (2003). Type I error rate and power of three normality tests.

Pakistan Journal of Information and Technology, 2(2), 135-139. Retrieved

January 10, 2009, from http://www.scialert.net/pdfs/itj/2003/135-139.pdf

Merton, R. (1995). Influence of mathematical models in finance on practice: Past,

present, and future. Financial Practice & Education, 5(1), 7-15. Retrieved

November 11, 2006, from the MasterFILE Premier database.

Miller, M. (1977). Debt and taxes. Journal of Finance, 32(2), 261-275. Retrieved

November 23, 2006, from the EBSCOhost database.

Modigliani, F. (1982). Debt, dividends policy, taxes, inflation, and market valuation.

Journal of Finance, 37(2), 255-273. Retrieved November 23, 2006, from the

EBSCOhost database.

Modigliani, F., & Miller, M. (1963). Corporate income taxes and the cost of capital: A

correction. American Economic Review, 53(3), 433-443.

Modigliani, F., &. Miller, M. (1958). The cost of capital, corporation finance and the

theory of investment. American Economic Review, 48(3), 261-297. Retrieved

November 23, 2006, from the EBSCOhost database.

Mulvey, M., & Allen, D. (2000). Experiential perspectives on the economics of everyday

life. Advances in Consumer Research, 27(1), 12-12. Retrieved November 11,

2006, from the Business Source Complete database.

Murali, R., & Welch, J. (1989). Agents, owners, control, and performance. Journal of

Business Finance & Accounting, 16(3), 385-398. Retrieved May 12, 2008, from

Business Source Complete database.

 93

Myers, S. (1984). The capital structure puzzle. Journal of Finance, 39(3), 575-592.

Retrieved May 13, 2008, from Business Source Complete database.

Ni, J., & Yu, M. (2008). Testing the pecking-order theory: Evidence from Chinese listed

companies. Chinese Economy, 41(1), 97-113. Retrieved June 15, 2008,

doi:10.2753/CES1097-1475410105

Nippani, S., Vinjamury, R., & Bathala, C. (2008). Bank size and corporate governance

structure. ICFAI Journal of Bank Management, 7(4), 7-17. Retrieved December

22, 2008, from Business Source Complete database

OECD. (2004). Principles on corporate governance. Retrieved October 10, 2006, from

http://www.oecd.org/dataoecd/32/18/31557724.pdf

Parkin, D., & Hollingsworth, B. (1997). Measuring production efficiency of acute

hospitals in Scotland, 1991-94: Validity issues in data envelopment analysis.

Applied Economics, 29(11), 1425-1433. Retrieved June 15, 2008,

doi:10.1080/000368497326255

Pasiouras, F. (2008). International evidence on the impact of regulations and supervision

on banks' technical efficiency: An application of two-stage data envelopment

analysis. Review of Quantitative Finance and Accounting, 30(2), 187-

223. Retrieved May 26, 2008, from ABI/INFORM Global database.

Ramanathan, R. (2007). Performance of banks in countries of the Gulf Cooperation

Council. International Journal of Productivity and Performance

Management, 56(2), 137-154. Retrieved May 24, 2008, from ABI/INFORM

Global database.
 94

Rynes, S., & Shapiro, D. (2005). Public policy and the public interest: what if we

mattered more? Academy of Management Journal, 48(6), 925-927. Retrieved

November 10, 2006, from the Business Source Complete database.

SAMA. (1957). Chapter of the Saudi Arabian Monetary Agency. Retrieved June 11,

2008, from http://www.sama.gov.sa/en/control/procedure/cofmblr/1.htm

SAMA. (2008). Licensed foreign banks’ branches. Retrieved June 10, 2008, from

http://www.sama.gov.sa/en/link/w_in_ksa.htm.

Sanjeev, G. M. (2007). Does banks’ size matter in India? Journal of Services

Research, 7(1), 135-144. Retrieved May 26, 2008, from ABI/INFORM

Global database.

Scheel, H. (2000). EMS: Efficiency Measurement System User’s Manual. Retrieved

November 18, 2008, from http://www.wiso.uni-

dortmund.de/lsfg/or/scheel/ems/ems.pdf

Scott, W. R. (2003). Organizations: Rational, Natural, and Open Systems (5th ed.). Upper

Saddle River, NJ: Prentice Hall.

Sharif, A. (2006). Gulf suffers from poor corporate governance. Gulfnews.com. Retrieved

October 14, 2006, from

http://archive.gulfnews.com/business/General/10071914.html

Shen, M., Hsu, C., & Chen, M. (2006). A study of ownership structures and firm values

under corporate governance: The case of listed and OTC companies in Taiwan’s

finance industry. Journal of American Academy of Business, Cambridge, 8(1),

184-191. Retrieved May 13, 2008, from Business Source Complete database.
 95

Shleifer, A. & Vishny, R. W. (1997). A survey of corporate governance. Journal of

Finance. 52(2), 737–783. Retrieved February 13, 2008, from Business Source

Complete database.

Shleifer, A., & Vishny, R. (1986). Large stockholders and corporate control. Journal of

Political Economy, 94(3), 461-488. Retrieved May 11, 2008, from Business

Source Complete database.

Smith, C. W. (1990). The Modern Theory of Corporate Finance (3rd ed). US: McGraw-

Hill.

Sufian, F. (2007). The efficiency of Islamic banking industry in Malaysia :Foreign vs

domestic banks. Humanomics, 23(3), 174-192. Retrieved May 26, 2008, from

ABI/INFORM Global database.

Sufian, F., & Abdul-Majid, M. Z. (2007). Singapore banking efficiency and its relation to

stock return: A DEA window analysis approach. International Journal of

Business Studies, 15(1), 83-106. Retrieved May 26, 2008, from ABI/INFORM

Global database.

Tadawul. (2007). Annual Report. Retrieved June 7, 2008, from

http://www.tadawul.com.sa/Resources/Reports/Yearly_en.html.

Tadawul. (2009). Trading Statistics. Retrieved January 3, 2009, from

http://www.tadawul.com.sa/static/pages/en/SOP/SOP_01_2008.pdf

Thomsen, S., & Pedersen, T. (2000). Ownership structure and economic performance in

the largest European companies. Strategic Management Journal, 21(6), 689-705.

Retrieved November 2, 2007, from ABI/INFORM Global database.

 96

Treynor, J. (1981). What does it take to win the trading game? Financial Analysts

Journal, 37(1), 55. Retrieved June 7, 2008, from Business Source Complete

database.

Tricker, B. (2000). Valedictory editorial: So-long, and thanks for all the fish. Corporate

Governance: An International Review, 8(4), 403-405. Retrieved November 11,

2006, from the Business Source Complete database.

Wang, W. K., Huang, H. C., & Lai, M. C. (2005). Measuring the relative efficiency of

commercial banks: A comparative study on different ownership modes in

China. Journal of American Academy of Business, Cambridge, 7(2), 219-223.

Retrieved May 24, 2008, from ABI/INFORM Global database.

Williams, E., & Findlay III, M. (1983). Is common stock obsolete? Abacus, 19(1), 39-55.

Retrieved November 10, 2006, from the Business Source Complete database.

Xu, X., & Wang, Y. (1999). Ownership structure and corporate governance in Chinese

stock companies. China Economics Review, 10(1), 75-98.

Yalama, A., & Coskun, M. (2007). Intellectual capital performance of quoted banks on

the Istanbul stock exchange market. Journal of Intellectual Capital, 8(2), 256.

Retrieved May 26, 2008, from ABI/INFORM Global database.

Yue, P. (1992). Data envelopment analysis and commercial bank performance: A primer

with applications to Missouri banks. The Federal Reserve Bank of St. Louis

Review, 47(1), 31-45. Retrieved May 18, 2008, from

http://research.stlouisfed.org/publications/review/92/01/Data_Jan_Feb1992.pdf
 97

Zhu, J. (2004). Quantitative Models for Performance Evaluation and benchmarking:

Data Envelopment Analysis with Spreadsheets and DEA Excel Solver (2nd ed.).

Norwell, MA: Kluwer Academic Publishers.

 98

APPENDIX A: SIGNED INFORMED CONSENT: PERMISSION TO USE

PREMISES, NAME, AND/OR SUBJECTS OF FACILITY, ORGANIZATION,

UNIVERSITY INSTITUTION, OR ASSOCIATION

99
100
 101

APPENDIX B: UNIVERSITY OF PHOENIX IRB APPROVAL

102