The effect of corporate governance on financing decisions: the case of Saudi Arabia

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Table of Contents

Chapter 1: Introduction3

Research Problem5

Objectives and Aim of the study6

Research Questions7

Chapter 2: Literature Review8

Corporate Governance mechanisms9

Board Size9

Board Composition9

Audit Committee11

CEO status11

Chapter 3: Proposed Methodology15

Research Method15

Sample & Model15

Timescales16

Conclusion18

Chapter 1: Introduction

This study aims to contribute to the corporate governance literature by analysing the effect of corporate governance effects on financing decisions in Saudi Arabian listed companies. Particularly it analyses the effect of board size; ownership concentration and corporate governance reporting on the debt-to-equity ratio. The investigation of these aspects of research in Saudi business environment may be distributed prior investigations and explanations to those carried out in more developed countries.

Research associated to determinant of corporate capital structure is a well recognized part of the accounting and finance research. Modigliani and Miller (1958) is the first to discover this area of research. They also provided another study in the same area of research after changing certain assumptions, such as relaxation of the prefect assumption of the market and subject to corporation tax in their models (Miller and Modigliani, 1963). In a later study recommended that the company's value will be improved if the debt level increases as the interest rate is tax deductible, so the companies that enjoy the protection of the tax debt when financing their activities to long-term debt.

Practitioners and academicians reasonably agree that good corporate governance has immense importance in economy. Today emerging economies like, Saudi Arabia, pay much attention towards corporate governance. It is considered to be the foundation of economic reforms for promoting growth and stability in developing countries. Inefficient corporate governance was looked at as the prime reason for Asian crisis of 1997 and then national governments as well as international organisations acknowledged the substantial role of corporate governance and started working to develop a strong governance mechanism.

The most critical financial decision that is faced by organisations is to choose among equity capital and debt (Glen & Pinto, 1994). The capital structure of a firm is formulated by an adequate equity and debt mixture in order to finance the operations. One of the most crucial decisions faced by any business organisation is to structure and formulate an optimal capital structure. These decisions are crucial because every firm needs to increase its return on investments and such decisions also play a role in organisation's ability to compete effectively in the global environment. Formulating a capital structure portfolio is prime issue for a firm because soundness of a firm's portfolio will generate more wealth and also maintain its sustainability. Generally, several alternatives are available for a firm to make the most relevant choice from for the capital structure. The options involve making a choice of a large or a small amount of debt. For the purpose of capital structuring, a firm can opt for lease financing, using warrants, issuing bonds that are convertible, forward contracts or trade bonds swapping. Often, firms differ in their approach in how they handle the capital structure issue; aiming to formulate a structure ...