Corporate board characteristics and banks valuation measures: Empirical evidence from the MENA Region

Technical Summary: Corporate Board Characteristics and Banks Valuation Measures: Empirical Evidence from the MENA Region

Problem Statement and Research Context
Effective corporate governance is critical for maintaining public trust and ensuring the stability of the banking sector, particularly given the systemic risks associated with bank failures and the potential for macroeconomic contagion. While the relationship between corporate governance and bank performance is well-documented in developed markets, the literature regarding the Middle East and North Africa (MENA) region remains fragmented. Existing studies often focus exclusively on Gulf Cooperation Council (GCC) countries, limiting the generalizability of findings to the broader MENA region. Furthermore, prior research frequently overlooks the distinct governance dynamics of Islamic banks, which operate under Sharia-compliant principles prohibiting interest (riba), excessive uncertainty (gharar), and gambling (maysir).

This study addresses these gaps by investigating the extent to which corporate board characteristics influence the market valuation of banks across the MENA region. It specifically aims to compare the efficacy of governance mechanisms between conventional and Islamic banking models over the period 2010–2024, utilizing a comprehensive dataset of 104 publicly traded banks.

Methodology
The research employs a panel data approach covering 104 banks (75 conventional and 29 Islamic) across 12 MENA countries. The study utilizes four distinct valuation measures as dependent variables: Tobin's Q, Market-to-Book (MB) ratio, Price-to-Earnings (P/E) ratio, and Stock Returns.

To ensure robustness and address potential econometric challenges such as endogeneity, dynamic panel bias, and unobserved heterogeneity, the authors employ two primary estimation techniques:

1. Fixed Effects (FE) Model: Used to control for time-invariant bank-specific heterogeneity.
2. System Generalized Method of Moments (GMM): Specifically the two-step system GMM estimator (Arellano-Bover/Blundell-Bond) with Windmeijer finite-sample correction. This approach mitigates endogeneity by using internal instruments (lagged levels and differences) and handles arbitrary patterns of autocorrelation and heteroscedasticity.

The independent variables are categorized into three groups:

• Ownership Structure: State ownership type and ownership concentration.
• Board Characteristics: Board size, CEO-Chairman duality, board independence (proportion of independent directors), and board gender diversity.
• Board Committees: Existence of Audit and Risk committees, and Audit Committee independence.

Control variables include bank size (log of total assets), Return on Assets (ROA), Loan-Loss Reserves (LLR), and real GDP growth. The analysis is conducted on the full sample and then stratified into sub-samples for conventional and Islamic banks to test for model-specific variations.

Key Contributions
This paper makes several distinct contributions to the literature:

• Regional Scope: It moves beyond the GCC-centric focus of previous studies to provide a comprehensive analysis of the broader MENA region, encompassing diverse economic and institutional environments.
• Comparative Analysis: It is among the first studies to systematically compare the impact of corporate governance on the valuation of both conventional and Islamic banks within the same empirical framework, highlighting how different business models respond to governance mechanisms.
• Theoretical Integration: The study adopts a multi-theoretical approach, integrating Agency Theory, Stakeholder Theory, Resource Dependency Theory, Signalling Theory, Managerial Entrenchment Theory, and Risk-Based perspectives to interpret the empirical findings.
• Variable Specificity: It examines under-researched variables in the Arab banking context, such as board gender diversity and the specific roles of audit and risk committees, while controlling for ownership structures (public vs. private).

Empirical Results
The study yields consistent evidence that corporate board characteristics significantly influence bank valuation in the MENA region, though the strength and significance of these effects vary across valuation metrics and banking models.

• Ownership and Board Structure:

  • Ownership Concentration: Exhibits a positive and statistically significant relationship with all four valuation measures (Tobin's Q, MB, P/E, Returns) at the 5% level. This aligns with agency, stewardship, and monitoring theories, suggesting that blockholders enhance value through improved oversight.
  • Board Independence: Shows a positive effect on valuation, particularly on MB and P/E ratios, supporting managerial entrenchment theory.
  • Gender Diversity: Female representation on boards is positively associated with Tobin's Q, supporting resource dependency theory.
  • Duality: CEO-Chairman duality demonstrates a negative and significant relationship with stock returns, indicating that concentrated decision-making power may diminish governance effectiveness and shareholder value.

• Board Committees:

  • The existence of Audit and Risk committees is positively related to valuation measures. The effect is more pronounced for the Risk Committee.
  • Audit Committee independence (AO) shows a relatively limited influence, suggesting that the mere existence of these committees may be more critical for value creation than their specific independence metrics.

• Conventional vs. Islamic Banks:

  • Conventional Banks: Governance mechanisms are more closely aligned with market valuation. Ownership concentration, board independence, and the existence of audit/risk committees show strong, significant positive correlations with valuation metrics.
  • Islamic Banks: The alignment between governance mechanisms and valuation is less evident. Ownership concentration and board independence show weaker or insignificant relationships with most valuation measures. This suggests that Islamic banks are influenced by additional institutional factors, such as Sharia supervisory boards, which may substitute or complement traditional governance structures.
  • Consistency: Gender diversity remains the only factor showing a consistent positive association with value measures across both banking models, although the magnitude of the coefficient is lower for Islamic banks. Duality negatively impacts returns in both models.

• Control Variables:

  • Profitability (ROA) and Bank Size (SIZE) consistently show positive relationships with valuation.
  • Loan-Loss Reserves (LLR) exhibit a negative effect, highlighting the detrimental impact of deteriorating asset quality.

Significance and Claims
The authors claim that their findings offer valuable insights for bank managers, investors, customers, and policymakers. The study demonstrates that while corporate governance is a significant driver of bank value in the MENA region, the efficacy of specific mechanisms is contingent upon the banking model.

The paper posits that conventional banks, operating under shareholder-oriented frameworks, respond more predictably to standard governance indicators (e.g., board independence, ownership concentration). In contrast, Islamic banks operate within a more complex governance environment where ethical and religious oversight (Sharia boards) may play a pivotal role, potentially diluting the direct impact of traditional board characteristics on market valuation.

The study concludes that future research should consider more comprehensive governance measures tailored to Islamic banking, such as Sharia compliance metrics, and suggests that the relationship between governance and performance in the MENA region is not uniform but deeply rooted in institutional and business model specificities. The authors modestly suggest that while their study provides a robust empirical foundation, further qualitative and difference-in-difference analyses could deepen the understanding of how specific governance events and external shocks (such as geopolitical conflicts) impact bank value.