CORPORATE GOVERNANCE

Impact of Corporate Governance on Firm Performance & Profitability in UAE

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Abstract

There is a growing lack of confidence in global financial markets, which could be attributed to some aspects of corporate governance. Agency theory predicts potential conflicts of interest between corporate managers and stockholders that increase agency costs and reduce performance. Consistent with Bandura's social learning theory, this study will use multiple regression statistical analysis to investigate the impact of private equity funds' corporate governance model on financial performance of of companies that make up the UAE stock exchanges i.e. both Abu Dhabi Stock Exchange and Dubai Stock Exchange. However, due to many constraints only top 10 companies, according to market value from the UAE stock exchanges will be considered. The study would help deepen understanding of corporate governance systems for investors, regulators and corporate managers who seek corporate governance reforms in corporations. Corporate governance mechanisms included board of directors, shareholders, committees, leverage, and executive compensation. The data were collected from the corporations' websites, annual financial reports, 10-K reports, proxy statements, and corporate governance documents filed electronically through EDGAR and Security Exchange Commission for a period starting from January 1, 2005 to December 31, 2009. The study will use Tobin's q, and return on equity investment to measure financial performance. The Edward Altman Z score will be used to measure financial distress. This can contribute to a more efficient allocation of long-term capital in the financial market, more peace of mind for investors, and less market volatility.

Table of Contents

Abstract2

Introduction4

Relation to Previous Research5

Proposed Methods7

Reflections8

Conclusion10

Time Table11

References12

Appendix14

Impact of Corporate Governance on Firm Performance & Profitability in UAE

Introduction

The goal of this research will be to answer one or more of the following questions relating to corporate governance and financial performance:

Research question 1: Is there a positive statistically significant relationship between corporate governance and firm size?

Research question 2: Is there a positive statistically significant relationship between corporate governance and profitability?

Research question 3: Is there a negative statistically significant relationship between corporate governance and financial distress? This will be looked at by calculating the Altman's Z score of each of the company used in the study and then relating it with the variables of corporate governance. Altman Z score is the measure of the probability of a company going bankcrupt.

The purpose of the research will be to examine a quantitative relationship between corporate governance mechanisms and their impacts on financial performance in the firms in UAE.

Moreover, I want to contribute to the corporate governance literature with the view of helping:

1. Institutional and individual investors identify and develop a dynamic approach to portfolio management by investing in corporations that promote good corporate governance practices.

2. Corporations that want to make changes to their corporate governance practices to know which variables are necessary to impact their financial performance.

3. Legislators to identify and focus on corporate governance mechanisms that impact financial distress and promote economic growth.

Relation to Previous Research

Despite increasing attention in corporate governance literature to broad stakeholder concerns, including corporate social responsibility (Bhasa, 2004; Kakabadse ...