The effect of internal corporate governance on earnings quality and firm performance in GCC countries

Abstract

There has been an increase in the importance of corporate governance (CG) around the world, seeking to increase the protection and confidence among investors from fraudulent and unethical practices. Fama & Jensen (1983) argue that characteristics of boards of directors and ownership are important determinates of internal CG to mitigate agency problems in publicly listed firms. CG proponents argue that firms with well-implemented CG structures outperform those with weak CG structures (Lipton & Lorsch, 1992; Jensen, 1993). Nguyen et al., (2014) assert that the structure of internal CG is important, especially where there is little and ineffective corporate control (e.g. capital market and the regulatory system). They also encourage more empirical research to understand the effect of international diversity on internal CG. A plethora of literature has examined the association between CG, earnings quality (EQ), firm performance and firm value (Weir & Laing, 2000; Bozec, 2005). However, there are limited studies examining these associations in emerging markets (Van Essen et al., 2012), especially Gulf Cooperation Council (GCC) countries (Alghamdi, 2012, Baydoun et al., 2013). Furthermore, there is a lack of literature examining the impact of royal family members on EQ, firm performance and firm value.