Does corporate governance quality improve credit ratings of financial institutions? Evidence from ownership and board structure

Abstract

Purpose

The purpose of this paper is to examine to which extent ownership and board structure improve financial institutions’ credit ratings.

Design/methodology/approach

Ordered Probit regression models were used to examine the association between corporate governance attributes and banks’ credit ratings. The sample consists of 97 publicly traded financial institutions on Gulf Cooperation Council (GCC) stock exchange markets and cover the period 2010–2019. All GCC countries were considered in this study which are United Arab Emirates, Saudi Arabia, Bahrain, Oman, Kuwait and Qatar.

Findings

The results show that banks’ credit ratings are positively associated with the size of the board of directors and with the number of female directors serving in the board of directors. And it is negatively associated with the frequency of board meetings. Furthermore, this study finds evidence that nonbank financial institutions’ credit ratings are positively associated with CEO duality and with frequency of board meetings. Also, this study shows that their credit ratings are negatively associated with the ownership percentage held by the major five shareholders and with the number of board members serving in the board of directors.

Originality/value

Unlike previous research, this study focuses on the effect of the role of two different corporate governance dimensions, namely, ownership and board structure on the rating of financial institutions. This paper contributes to the extant literature in various ways. It bridges the gap of this topic in the GCC region. And, unlike previous research, this study focused on the financial sector and divided the sample into banks and other financial institutions to examine both subsamples separately. Also, this study introduced new ownership and board structure variables for the purpose of investigating the impact of corporate governance on financial institutions’ credit ratings such as the presence of women in the board of directors.

Citation

Mili, M. and Alaali, Y. (2023), "Does corporate governance quality improve credit ratings of financial institutions? Evidence from ownership and board structure", Corporate Governance, Vol. 23 No. 4, pp. 867-887. https://doi.org/10.1108/CG-05-2022-0232