How corporate governance quality affects investment efficiency? An empirical analysis of nonfinancial companies in the Gulf Cooperation Council 2015-2020

Abstract

AbstractMotivated by agency and stakeholder theories, this study aims to investigate the effect of corporate governance quality as measured by a single index on investment efficiency in the six Arab Gulf countries, commonly known as Gulf Cooperation Council (GCC) for the period 2015–2020. The study tries to develop a corporate governance quality model comprises 60 items under five main corporate governance elements of disclosure; responsibilities of the board; board effective composition; rights of shareholders and the role of stakeholders; and examines its effect on firms’ investment efficiency in 301 non-financial firms listed in six emerging capital markets in the GCC region. The findings reveal significant evidence that good corporate governance quality as a composite index enhances investment efficiency and mitigates both over- and under-investment. However, when the subcomponents of the corporate governance quality index were regressed individually on investment inefficiency, the findings were mixed. Our findings remain consistent when we control for potential endogeneity bias. The study has theoretically contributed to the corporate governance literature on corporate governance indices and quality by proposing a corporate governance quality model that considers all stakeholders. The practical implications of the study emphasize the significance of good company governance as a driver of investment efficiency; companies are expected to manage resources effectively, and regulators can implement regulations that enhance corporate governance standards in the GCC countries using the developed corporate governance quality model.

Keywords

• Corporate governance quality
• investment efficiency
• Gulf Cooperation Council
• overinvestment
• underinvestment