Family business corporate performance and capital structure : evidence from Saudi Arabia

Alghamdi, Mohammed Saied Makni

Abstract

Agency costs, ownership concentration, firm performance, and capital structure are four constructs that have been extensively examined in finance literature. The effect of agency costs and ownership concentration on firm performance and capital structure, however, has been under-researched despite the formulation of theoretical propositions regarding the relationship between these constructs. The Saudi Arabian economy is characterized by a large number of family-owned businesses. However, few studies have investigated family firms in the context of capital market research. Nevertheless, in a study of the top 300 manufacturing and top 50 merchandising and other companies based on the 1965 Fortune 500 list (Burch, 1972) , it was found that more than 47% of these publicly firms in the US were controlled by families.

This research addresses the following questions: Is there any significant difference in agency costs between family firms and non-family firms? Do family-owned firms perform better? Does concentration of ownership affect firm performance? In addition, the research addresses the determinants of capital structure: Is there a difference in capital structure between family and non-family firms?

The main objectives of this research attempt to fill a research gap in the relationship between separation of ownership and control, as well as the relationship among ownership concentration, firm performance, and determinants of capital structure in one of the emerging markets, Saudi Arabia. This offers an ideal opportunity to examine the determinants of capital structure in an environment free of taxation when comparing family and non-family firms. Saudi Arabia, in particular, has not been the focus of any such study, especially regarding agency costs in family-controlled firms. The present study, therefore, will provide new insights which will contribute to greater understanding of the concept of agency costs.

Chapter five of this study will examine the relationship between board mechanisms (board size, family member as a (CEO family) and CEO/Chair non-duality), ownership concentration, managerial ownership, agency costs, and firm performance (ROA, Tobin’s Q, and stock market return). The results of this study reveal that board mechanisms, managerial ownership, and agency costs affect firm performance, while ownership concentration has no affect on firm performance. In chapter six, “Determinants of Capital Structure”, the study identifies a significant difference between the capital choices of family and non-family Saudi firms. Overall, there is a difference between family and non-family firms’ performance and determinants of capital structure.

This study was implemented through a quantitative approach. Secondary data obtained from published annual financial report data and the DataStream database were analysed to test the impact of agency costs and family ownership on firm performance and the determinants of capital structure. To ensure confidence in these estimates, this thesis uses two-stage least squares (2SLS) to answer the research questions and to address the issues of endogeneity and unobserved heterogeneity. The focus of the investigation was firms listed on the Saudi Stock Market Exchange (SSE). The dataset is a panel of all firms on the SSE from 2006-2013, excluding financial firms. This study is important because the problem of agency costs has not previously been studied in the Saudi context, so this study will contribute to understanding agency theory in family businesses. It will have a practical benefit for firms, addressing government problems, and the stock exchange in Saudi Arabia.

Citation

Alghamdi, M. S. M. Family business corporate performance and capital structure : evidence from Saudi Arabia. (Thesis). University of Hull. https://hull-repository.worktribe.com/output/4218255

• Thesis Type: Thesis
• Deposit Date: Jul 28, 2016
• Publicly Available Date: Feb 23, 2023
• Keywords: Business
• Public URL: https://hull-repository.worktribe.com/output/4218255
• Additional Information: Business School, The University of Hull
• Award Date: Mar 1, 2016