Corporate governance, Islamic governance and earnings management in Oman: A new empirical insights from a behavioural theoretical framework

Purpose: This paper examines the impact of corporate (CG) and Islamic (IG) governance mechanisms on corporate earnings management (EM) behaviour in Oman. Design/Methodology/Approach: We employ one of the largest and extensive datasets to-date on CG, IG and EM in any developing country, consisting of a sample of 116 unique Omani listed corporations from 2001 to 2011 (i.e.,1,152 firm-year observations) and a broad CG index containing 72 CG provisions. We also employ a number of robust econometric models that sufficiently account for alternative CG/EM proxies and potential endogeneities. Findings: First, we find that, on average, better-governed corporations tend to engage significantly less in EM than their poorly-governed counterparts. Second, our evidence suggests that corporations that depict greater commitment towards incorporating Islamic religious beliefs and values into their operations through the establishment of an IG committee tend to engage significantly less in EM than their counterparts without such a committee. Finally and by contrast, we do not find any evidence that board size, audit firm size, the presence of a CG committee and board gender diversity have any significant relationship with the extent of EM. Originality: To the best of our knowledge, this is a first empirical attempt at examining the extent to which CG and IG structures may drive EM practices that explicitly seeks to draw new insights from a behavioural theoretical framework (i.e., behavioural theory of corporate boards and governance). Keywords: Corporate governance, Islamic governance, earnings management, behavioural theory, endogeneity, Oman. Paper type: Research pape

Empirical essays on corporate governance and corporate decisions in emerging economies: the case of Oman

This thesis consists of three essays analysing corporate governance (CG) reforms in emerging economies, with a particular focus on Oman. The three essays focus on three closely related CG topics that quantitatively examine the extent to which Omani CG reforms have been effective in enhancing three main corporate policy decisions. In the first essay, the thesis investigates the level and determinants of voluntary CG compliance and disclosure. The central objective of this essay is to empirically examine two main research questions: First, what is the level of voluntary compliance with, and disclosure of, CG rules contained in the 2002 Omani CG Code for listed firms?; Secondly, what factors determine the level of voluntary compliance with, and disclosure of, CG recommendations contained in the 2002 Omani CG Code for listed firms? Exploring these questions has the capacity of improving current understanding of firms’ willingness to voluntarily engage in and disclose more transparent information about their CG practices. The findings indicate that Omani firms have responded positively to the 2002 CG Code’s best practice recommendations. Relying on insights from agency, legitimacy, resource dependence and signalling/stakeholder theories, the findings also suggest that ownership structure and board characteristics have significant impact on firm-level voluntary CG disclosure. Specifically, the findings suggest that government ownership, institutional ownership and foreign ownership, board size, the presence of a CG committee, and board diversity on the basis of nationality are positively related to the level of CG compliance and disclosure, whereas block ownership and board diversity on the basis of gender are negatively associated with the level of CG compliance and disclosure. The second essay investigates how effective the CG measures contained in the 2002 Omani voluntary CG Code and other CG mechanisms proposed by other laws, such as the Companies Law, mitigate agency problems associated with capital structure (CS) decisions. The main purpose of this essay is to empirically examine the extent to which firm-level CG quality, ownership structure and board/audit characteristics influence capital structure, as well as the corporate decision (choice) to issue equity or debt in seasoned equity offerings (SEOs). This examination has the ability to expand current understanding of Omani firms’ capital structure decisions and the role that CG mechanisms can play with respect to this corporate decision. Informed by insights from tax-driven (e.g., Modigliani-Miller capital structure irrelevance and trade-off) and non-tax-driven (e.g., agency, market timing, pecking order, and signalling) capital structure theories, the empirical evidence reveals that CG is a significant determinant of capital structure decisions and SEOs. First,the findings suggest that CG index, government ownership, institutional ownership, foreign ownership, board size, audit firm size and CG committee are negatively related to capital structure, whereas block ownership is positively associated with capital structure. Second, the results indicate that firms with better governance structures, more institutional ownership and audited by big four are more likely to raise additional financing through SEOs. By contrast, firms with poor CG mechanisms, more government ownership more, foreign ownership, block ownership, large boards, and CG committee are less likely to raise additional financing through SEOs. The final essay investigates the extent to which a broad composite CG index, corporate ownership structure, and board/audit characteristics can explain observable changes in firm-level earnings management (EM). The key objective of this essay is to investigate how effective the CG recommendations contained in the 2002 Omani CG Code and other CG mechanisms proposed by other laws, such as the Companies Law, constrain earnings management practices. The result has the potential of deepening current understanding of the ability of different CG measures to mitigate agency problems and reduce agency costs associated with earnings management. Utilising insights from agency, stakeholder, stewardship and signalling theories, the study finds that firms with better governance structures, government ownership, institutional ownership, foreign ownership, audited by big four and CG committee are negatively related to earnings management. In contrast, firms with poor CG mechanisms, more block ownership, larger boards, and CG committee are positively associated with earnings management. The reported empirical findings of the three essays are fairly robust across a number of econometric models and estimations that take into account alternative variables and potential endogeneity problems. In brief, given the dearth of empirical evidence on the nature of CG’s influence on these three corporate policy decisions in emerging economies in particular, this thesis seeks to contribute to the literature by providing new insights with specific focus on CG reforms that have been pursued in Oman. Specifically, this thesis contributes to the limited, but steadily growing body of literature on the effectiveness of CG mechanisms in influencing a number of crucial managerial decisions, including voluntary disclosure, financing and earnings management, in emerging economies

Islamic values, ownership structure, corporate governance and disclosure in Saudi Arabian publicly listed corporations

We investigate whether and to what extent publicly listed Saudi corporations voluntarily comply with and disclose recommended good corporate governance (CG) practices, and distinctively, examine whether the observed cross-sectional differences in such voluntary CG disclosures can be explained by corporate commitment to voluntarily embrace and incorporate Islamic values into business operations, as well as by traditional ownership structure and CG mechanisms. We find that corporations that depict greater commitment towards incorporating Islamic values into their operations through high Islamic values disclosure index score engage in higher CG disclosures than those that are not. Additionally, our results suggest that corporations with larger boards, a big-four auditor, higher government ownership, a CG committee and higher institutional ownership, disclose considerably more than those that are not. By contrast, we find that an increase in block ownership significantly reduces voluntary CG disclosure. Our results are generally robust to a number of econometric models that control for different types of disclosure indices, general firm-specific characteristics, and firm-level fixed-effects. Keywords: Islamic values; Ownership structure; Corporate governance; Disclosure; Saudi Arabia<br/