The effect of the corporate governance code on foreign ownership in UAE

Abstract

This study investigates the effect of corporate governance mechanisms in the UAE on foreign ownership. Although corporate governance has been widely studied, this is not the case for the UAE due to recent governance regulations. In the UAE, the government imposed a mandatory corporate governance code (MCGC) for publicly listed firms at the end of 2009. This study contributes to the corporate governance literature by investigating the consequences of imposing the MCGC in the UAE. The main focus of this practical research is to examine the effect of MCGC on foreign ownership either directly or indirectly through firms’ performance measured by the mediating effect on return on asset (ROA). The governance mechanisms employed in this study include board size, board independence and audit committee characteristics. The study also investigates the moderating effect of government ownership on the association between corporate governance and firms’ performance, and whether that effect in turn improves foreign ownership in UAE firms. The study uses secondary data from 72 publicly listed firms from 2010 to 2013. Data collected from governance reports and annual reports were used to conduct a panel data analysis. The methodology used in this study is another contribution of this research, given the use of Structural Equation Modelling (SEM) to analyse the mediating variable – performance measurement – and the moderator variable – government ownership. The study reveals that MCGC mechanisms play a significant role in attracting foreign ownership, mainly, board size and audit committee independence. In contrast, board independence has a negative effect on foreign ownership. When the effects of MCGC mechanisms on firms’ performance are examined, none of those mechanisms have a significant effect on ROA. Moreover, the study finds that government ownership significantly moderates the association between MCGC and firms’ performance. Particularly, the interaction between government ownership with board independence and percentage of financial experts within the audit committee have a positive moderation effect on ROA, but a negative moderation effect on ROA for the interaction with board size. Nevertheless, the moderation effect of government ownership does not improve the mediation effect of firms’ performance on foreign ownership. Therefore, this study demonstrates the vital role of government ownership.