An assessment of the impact of corporate governance practices on the values of firms in the United Kingdom and Kingdom of Saudi Arabia : a comparative study using the Ethical Process Thinking Model (EPTM)
There are many scandals and collapses of companies around the world, and there has been a renewed interest in the impact of corporate governance on the firm value. According to the literature on corporate governance, the roles of regulatory authorities, company boards and management, vendors, customers, banks and other funding agencies including creditors are important in contributing to the firm value. This is true both in the case of both developing and developed countries. In the context of both developing and developed countries, the protection of shareholders depends mainly on adoption and following of good corporate governances practices. However, it needs to be appreciated that the impact of corporate governance practices in different countries might differ because of dissimilar corporate governance structures evolved from disparate social, economic and regulatory conditions existing in the respective countries. Thus, the differences in the social, economic and regulatory conditions prevailing in the developing and developed countries determine the nature and operational processes of corporate governance practices. Such differences in the corporate governance practices, in turn, have a serious impact on the firm value. The differences in the regulatory framework and market behaviour that existin the developing and developed countries appear to influence the value and performance of the firm to a large extent. Therefore, the corporate governance practices in developed countries appear to be superior in quality and they are likely to have a beneficial influence in improving the firm value in the developed countries. Furthermore, the introduction of corporate governance standards by the Organisation for Economic Cooperation and Developments (OECD) in 1999 had given a head-start for the developed economies to frame appropriate governance structures over the period. This has helped the developed countries to have effective corporate governance practices in place to aid the improvement in firm value.On the other hand, in the case of developing countries, lack of development of a well-structured regulatory framework and the differences in other social and economic conditions tend to affect the quality of the corporate governance practices. These factors also affect the effective implementation of good corporate governance practices. As a result, the corporate governance practices may not have the desired positive influence on the firm value in the case of developing countries. For example, in such countries, where state ownership companies are predominant, quality of the government officials managing the state-owned corporations determine the corporate behaviour and the resultant impact on the firm value. Similarly, the development of healthy financial markets as affected by the legal foundations and enforcement also could influence the level and quality of corporate government practices in the developing economies. Ownership structure is another important factor that has its own impact on the effectiveness of corporate governance practices in the developing countries. Therefore, it becomes important for the developing countries to consider these differences in the analysis of the prevailing corporate governance practices and their impact on firm value, in order to have a thorough understanding of the role of corporate governance and their influence in enhancing firm value. However, it seems the existing literature is lacking in systematically discussing these differences.A great deal of research has been done in developed countries such USA and UK; however; there is relatively little evidence in the Middle East in this area especially in Saudi Arabia. This study investigates corporate governance practices and their impact on firm value in the United Kingdom and the Kingdom of Saudi Arabia. Quantitative data was analysed by SmartPLS software version 3.0. Operationalising a theoretical model described as the Ethical Process Thinking Model (EPTM)), a comparison was made between the listed companies in these two countries. This study is based on the two sets of data: (1) a sample of 342 firms listed in the listed on the London Stock Exchange and Saudi Stock Exchange (Tadawul); (2) Data was collected from the annual reports of listed companies over five years (2010 –2015).Different pathways enumerated in the TM displayed significant impact and implications on corporate governance leading to firm value. This study used three pathways out of six possible pathways, which are (i) Rule-based pathway (P→J→D) (ii) Principle-based pathway, (I→J→D) and (iii) preference-based pathway (P→D). The results indicated that the (P→J→D pathway found that there is significant relationship between board characters and audit committee and on the financial health and firm value, while the (I→J→D) pathway indicated that there issignificant relationship between profitability and liquidity on the financial health and firm value. Finally, the (P→D)pathway displayed that there is a direct impact of board characters and audit committee on firm value
