Al Naim, Abdulaziz (2022) Direct and Indirect Effects of the New Saudi Company Regulations on Financial Reporting Quality. PhD thesis, Victoria University Business School.

Abstract

This research aims to examine the direct and indirect effects of the New Saudi Company Regulations (NCR) on financial reporting quality (FRQ) on the Saudi stock market (Tadawul) for the period between 2015 and 2017. The main aim of the NCR, which includes extensive amendments to the regulations of the Saudi corporate business environment, is to improve the investment environment of the Saudi market and attract foreign capital and retain local capital to be consistent with one of the main objectives of Vision 2030. Such institutional changes are expected to affect FRQ in Saudi Arabia. Thus, this research aims to theoretically and empirically investigate how Saudi company-specific characteristics influenced FRQ in the context of the changing Saudi institutional environment (i.e. the NCR). This study reviewed recent changes in the NCR against the outcomes of prior studies. The review was used to assess whether the changes by Saudi regulators in the NCR to improve the FRQ are aligned with the findings reported in prior studies. The study drew on a combination of agency theory, institutional theory and codification theory to interpret the effect of NCR on FRQ in Saudi Arabia. This thesis primarily employed the modified Jones model as the primary proxy for measuring the dependent variable FRQ. The final sample of this study comprised 60 companies (180 observations). In addition to the modified Jones model, this study employed the performance�controlled Kothari model and the modified Kothari model, which were used as robustness tests to measure FRQ. To achieve the purpose of this study, a statistical comparison was made prior to and after the introduction of the NCR, by employing a quantitative method that depends on secondary data. The analysis of the NCR’s effect has been divided into two different pathways. First, the direct effect represents the direct pressure on FRQ brought by the Saudi government through the introduction of the NCR. It is represented through the year variables, as illustrated in the main models of this study. Second, the indirect effect is where the introduction of NCR indirectly influences FRQ through bringing about changes in company characteristics that affect FRQ. This thesis concludes that there was a direct significant effect, after controlling for the impact of changes in explanatory variables, on FRQ in Saudi Arabia after the introduction of the NCR. This result confirmed that there is a broad level of institutional pressure by the Ministry of Commerce and Investment of the Kingdom of Saudi Arabia to improve FRQ in Saudi companies, enabling them to achieve one of the main objectives of Vision 2030. In terms of the indirect pathway, the findings of this thesis show that FRQ was not affected by the changes in the characteristics of board of directors or factors that influence audit quality, as a result of the introduction of NCR. This result is attributed to one or more possible reason(s). Saudi companies need more time to comply with the NCR effectively, and (or) the NCR are not powerful enough to significantly affect some variables identified in this study as being relevant to FRQ, and (or) Saudi companies did not fully comply with the NCR and (or) some NCR regulations need further improvement. The findings of this thesis show consistency with agency theory, institutional theory and codification theory.

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