The complementary/substitution effects of post-privatization corporate governance mechanisms on firm performance in selected MENA countries

Purpose - The purpose of this paper is to expand understanding of the determinants of performance in newly privatized firms by empirically examining the interaction effect of internal corporate governance and Big Four auditors in Middle Eastern and North African countries. Specifically, the paper contributes to the existing literature by identifying whether there is a substitute or complementary relation between internal corporate governance mechanisms and Big Four auditors. Design/methodology/approach - A data set of 88 NPFs of MENA countries over the period 1987-2010 is used. The methodology is based on two-stage least squares regression analysis. Findings - Results show that government ownership and the proportion of outside directors can substitute for Big Four auditors. However, foreign ownership and the CEO duality reinforce each other to improve performance of NPFs. Overall, these findings suggest that in the presence of agency problems within privatization process, different combinations of internal corporate governance and Big Four auditors can serve as a monitoring response in NPFs and should yield a superior performance. Practical implications - This study gives insights to policy makers’ managers and regulators who are interested in investing in MENA region. The authors argue that information regarding who is auditing the firm is very value relevant for investors investing in the MENA region. Firms with Big Four auditor as external auditors are likely to disclose better information than those that are audited by non-Big Four auditors. Originality/value - This paper extends the understanding of the determinants of the post-privatization performance in MENA region. It fills the privatization literature void by introducing Big Four auditors as an external governance mechanism. To the authors’ knowledge, the authors’ work is the first study that investigates whether Big Four auditors play an important role and interact with internal corporate governance mechanisms to address the dominant/minority shareholders post-privatization agency problems.