Board Characteristics and Economic Value Added: Controlling for Endogeneity

Abstract

The characteristics of board of directors play a significant role in corporate governance and it is considered a major internal tool along with ownership characteristics to mitigate agency conflicts among management and owners as well as between controlling shareholders and minority shareholders by monitoring duties. This study investigates the association between board ownership, board characteristics and economic value added (EVA) after controlling the endogeneity problem that occur in governance studies. By using panel technical approach, the paper examines 468 observations of Saudi listed firms during 2010 to 2015. This paper applies the generalized method of moments (GMM) approaches to test the effects of the characteristics of board of directors and board ownership on economic value added (EAV) in Saudi listed firms. The results show that board size, the number of non- executive directors and audit committee independence were positively associated with economic value added, whereas board ownership, frequency of board meetings and CEO duality were found to be negatively related. Using EVA as performance measurement may be more useful than other performance measurements in a fluctuating market. The results have useful recommendations for shareholder, management and investors in Saudi environment.