Empirical Linkages among Corporate Governance, Institutional Environment and Economic Growth in Sharia Law Countries

Authors

  • Patrick Ssekitoleko North-West University
  • Wedzerai Musvoto North-West University

Keywords:

Corporate governance; institutional environment; economic growth; Granger Causality; Sharia law

Abstract

A surfeit of studies endorse both corporate governance and the institutional environment within which firms operate to promote the economic growth of countries, and that both institutions and corporate governance fortify each other. The research investigates the causal relationships among corporate governance, institutional environment and economic growth among Sharia law countries. Country-specific peculiarities and national institutions possess correlative effects on firm-level corporate governance. Thus, it is the study’s imperative to empirically investigate the impact of the Muslim ideology on firm-level corporate governance and institutions in influencing the economic growth of Sharia law countries. Annual data in the period 2006-2018 for a panel of 13 countries was examined using Panel Vector Autoregression and Panel Granger Causality test models. The results indicate that corporate governance has a negative significant effect on economic growth, while economic growth was found to have a positive significant effect on the institutional environment. Unidirectional causality is revealed from corporate governance, institutional environment to economic growth, and from economic growth, corporate governance to institutional environment. Policymakers ought to reshape the extant corporate governance routines and regulations with a view to registering a significant positive effect on economic growth, as corporate governance sets the trend for a reliable and growth-enhancing institutional environment.

References

Abrigo, M.R.M. & Love, I. (2016). Estimation of panel vector autoregression in Stata. The Stata Journal, 16(3), 778-804.

Abubakar, S. (2020). Institutional quality and economic growth: evidence from Nigeria. African Journal of Economic Review, 8(1), 48-64.

Acaravci, A. & Erdogan, S. (2017). The relationship between institutional structure and economic growth: a comparative analysis for selected countries. International Journal of Economics and Financial Issues, 7(6), 141-146.

Aguilera, R.V., Marano, V. & Haxhi, I. (2019). International corporate governance: A review and opportunities for future research. Journal of International Business Studies, 50(4), 457-498.

Alexiou, C., Tsaliki, P. & Osman, H.R. (2014). Institutional quality and economic growth: empirical evidence from the Sudanese economy. Economic Annals, 59(203), 119-137.

Ashley, R., Granger, C.W.J. & Schmalensee, R. (1980). Advertising and aggregate consumption: an analysis of causality. Econometrica: Journal of the Econometric Society, 48(5), 1149-1167.

Asteriou, D. & Hall, S.G. (2016). Applied Econometrics. 3rd ed. London: Palgrave (Macmillan Publishers Limited).

Baysinger, B. & Hoskisson, R.E. (1990). The composition of boards of directors and strategic control: Effects on corporate strategy. Academy of Management Review, 15(1), 72-87.

Beck, T., Demirguc-Kunt, A. & Levine, R. (2005). Law and firms' access to finance. American Law and Economics Review, 7(1), 211-252.

Briano-Turrent, C.G. & Rodriguez-Ariza, L. (2016). Corporate governance ratings on listed companies: An institutional perspective in Latin America. European Journal of Management and Business Economics, 25(2), 63-75.

Bun, M.J.G. & Kiviet, J.F. (2006). The effects of dynamic feedbacks on LS and MM estimator accuracy in panel data models. Journal of Econometrics, 132(2), 409–444.

Bushman, R. (2004). “Weak” governance may be optimal governance: a discussion of “corporate governance and backdating of executive stock options”. Contemporary Accounting Research, 26(2), 447–451.

Chisunga, D. (2015). Causal relationship between financial sector development and economic growth: a case of Zimbabwe. IOSR Journal of Business and Management 17(1), 1–12.

Chong, A. & Calderon, C. (2000). Causality and feedback between institutional measures and economic growth. Economics & Politics, 12(1), 69-81.

Col, B. & Sen, K. (2019). The role of corporate governance for acquisitions by the emerging market multinationals: evidence from India. Journal of Corporate Finance, 59, 239–254.

Dandume, M.Y. (2013). Institution and economic growth performance in Nigeria. MPRA Paper# 52356. Munich. https://mpra.ub.uni-muenchen.de/52356/1/MPRA_paper_52356.pdf Date of access: 02 Jun. 2021.

Daniel, S.J., Cieslewicz, J.K. & Pourjalali, H. (2012). The impact of national economic culture and country-level institutional environment on corporate governance practices. Management International Review, 52(3), 365-394.

Diallo, B. (2017). Corporate governance, bank concentration and economic growth. Emerging Markets Review, 32, 28-37.

Diamant, J. (2019). The countries with the 10 largest Christian populations and the 10 largest Muslim populations. https://www.pewresearch.org/fact-tank/2019/04/01/the-countries-with-the-10-largest-christian-populations-and-the-10-largest-muslim-populations/ Date of access: 14 Sept. 2020.

Farah, B., Elias, R., Aguilera, R. & Abi Saad, E. (2021). Corporate governance in the Middle East and North Africa: a systematic review of current trends and opportunities for future research. Corporate Governance: An International Review, 29(6), 630-660.

Giroud, X. & Mueller, H.M. (2010). Does corporate governance matter in competitive industries? Journal of Financial Economics, 95(3), 312–331.

Granger, C.W. (1969). Investigating causal relations by econometric models and cross-spectral methods. Econometrica: Journal of the Econometric Society, 37(3), 424-438.

Goldsmith, A.A. (2007). Is governance reform a catalyst for development? Governance: An International Journal of Policy, Administration, and Institutions, 20(2), 165-186.

Guei, K.M. & Le Roux, P. (2019). Trade openness and economic growth: evidence from the Economic Community of Western African States region. Journal of Economic and Financial Sciences, 12(1), a402. https://doi.org/ 10.4102/jef.v12i1.402 Date of access: 01 April 2021.

Holtz-Eakin, D., Newey, W. & Rosen, H.S. (1988). Estimating vector autoregressions with panel data. Econometrica: Journal of the Econometric Society, 56(6), 1371-1395.

IDA (International Development Association). (2021). Governance and institutions. https://ida.worldbank.org/theme/governance-and-institutions Date of access: 01 May 2021.

John, K. & Senbet, L.W. (1998). Corporate governance and board effectiveness. Journal of Banking & Finance, 22(4), 371-403.

Judge, W., Filatotchev, I. & Aguilera, R. (2010). Comparative corporate governance and international business research. Corporate Governance: An International Review, 18(6), 493-495.

Kantor, J., Roberts, C.B. & Salter, S.B. (1995). Financial reporting practices in selected Arab countries: An empirical study of Egypt, Saudi Arabia, and the United Arab Emirates. International Studies of Management & Organization, 25(3), 31-50.

Kaufmann, D., Kraay, A. & Mastruzzi, M. (2010). The worldwide governance indicators: methodology and analytical issues. Policy Research Working Paper# 5430. Washington. The World Bank Development Research Group.

Koop, G. (2013). Analysis of economic data. 4th ed. Chichester, West Sussex: John Wiley & Sons, Ltd.

La Porta, R., Lopez-de-Silanes, F., Shleifer, A. & Vishny, R. (1998). Law and finance. The Journal of Political Economy, 106(6), 1113–1155.

Lee, K. & Kim, B. (2009). Both institutions and policies matter but differently for different income groups of countries: determinants of long-run economic growth revisited. World Development, 37(3), 533-549.

Levin, A., Lin, C.F. & Chu, C.S.J. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of Econometrics, 108(1), 1-24.

Love, I. & Zicchino, L. (2006). Financial development and dynamic investment behavior: evidence from panel VAR. The Quarterly Review of Economics and Finance, 46(2), 190-210.

Lutkepohl, H. (2013). Vector Autoregressive Models. (In Hashimzade, N & Thornton, M.A. eds. Handbook of research methods and applications in empirical macroeconomics. Northampton, MA: Edward Elger Publishing, Inc, p.139-164).

Maddala, G.S. & Rao, A.S. (1973). Tests for serial correlation in regression models with lagged dependent variables and serially correlated errors. Econometrica: Journal of the Econometric Society, 41(4), 761-774.

Nabila A., Shazia Q. & Muhammad, N. (2015). Institutional quality and economic growth: panel ARDL analysis for selected developing economies of Asia. South Asian Studies, 30(2), 381-403.

Nawaz, S. (2015). Growth effects of institutions: a disaggregated analysis. Economic Modelling, 45, 118-126.

Naughton, B. (1995). Growing out of the plan: Chinese economic reform 1978–1993. Cambridge: Cambridge University Press.

Nguyen, C.P., Su, T.D. & Nguyen, T.V.H. (2018). Institutional quality and economic growth: the case of emerging economies. Theoretical Economics Letters, 8(11), 1943-1956.

Nickell, S. (1981). Biases in dynamic models with fixed effects. Econometrica: Journal of the Econometric Society, 49(6), 1417-1426.

North, D.C. (1990). Institutions, institutional change, and economic performance. Princeton: Princeton University Press.

OECD. (Organisation for Economic Co-operation and Development). (2015). Why good corporate governance is crucial to development. https://www.oecd.org/newsroom/whygoodcorporategovernanceiscrucialtodevelopment.htm Date of access: 05 May 2021.

Othman, Z. & Rahman, R.A. (2011). Understanding corporate governance from a social constructionist perspective. International Journal of Humanities and Social Science, 1(2), 123-127.

Otto, J.M. (2010). Introduction: investigating the role of Sharia in national law. (In Otto, J.M. ed. Sharia incorporated: a comparative overview of the legal systems of twelve Muslim countries in the past and present. Amsterdam: Leiden University Press. p17-49).

Pesaran, M.H. (2004). General diagnostic tests for cross section dependence in panels. Working paper in economics#0435. Cambridge. University of Cambridge.

Piesse, J., Strange, R. & Toonsi, F. (2012). Is there a distinctive MENA model of corporate governance? Journal of Management & Governance, 16(4), 645-681.

Qian, Y. (2000). The process of China’s market transition (1978–1998): The evolutionary, historical, and comparative perspectives. Journal of Institutional and Theoretical Economics, 156(1), 151-171.

Renders, A., Gaeremynck, A. & Sercu, P. (2010). Corporate governance ratings and company performance: A cross‐European study. Corporate Governance: An International Review, 18(2), 87-106.

Scott, W.R. (2001). Institutions and organizations. 2nd ed. London, New Delhi: Sage Publications.

Ssekitoleko, P. (2020). An integrated corporate governance framework for sharia law countries [Doctoral dissertation, North-West University]. Boloka Institutional Repository. http://repository.nwu.ac.za/handle/10394/36657

Sims, C.A., 1980, Macroeconomics and reality. Econometrica: Journal of the Econometric Society, 48(1), 1-48.

Škare, M. & Golja, T. (2014). The impact of government CSR supporting policies on economic growth, Journal of Policy Modeling, 36(3), 562–577.

Valeriani, E. & Peluso, S. (2011). The impact of institutional quality on economic growth and development: an empirical study. Journal of Knowledge Management, Economics and Information Technology, 1(6), 1-25.

Wilson, R. (2016). Does governance cause growth? Evidence from China. World Development, 79, 138-151.

WFE (World Economic Forum). (2018). The global competitiveness index historical databases 2006-2018. Geneva.

Wooldridge, J.M. (2016). Introductory econometrics: a modern approach. 7th ed. Boston, MA: Cengage Learning, Inc.

World Bank. (2020). Governance: overview. https://www.worldbank.org/en/topic/governance/overview Date of access: 01 May 2021.

World Bank. (2018). World development indicators. http://datatopics.worldbank.org/world-development-indicators/ Date of access: 11 Nov. 2020.

Yildirim, A. & Gokalp, M.F. (2016). Institutions and economic performance: a review on the developing countries. Procedia Economics and Finance, 38, 347-359.

Yusuf, M. & Malarvizhi, C.A. (2014). Institutional qualities and Nigeria’s economic growth Performance. Middle-East Journal of Scientific Research, 20(3), 308-316.

Zattoni, A., Dedoulis, E., Leventis, S. & van Ees, H. (2020). Corporate governance and institutions – a review research agenda. Corporate Governance: An International Review, 28(6), 465-487.

Zhou, N. & Guillen, M.F. (2019). Institutional complementarities and corporate governance: The case of hostile takeover attempts. Corporate Governance: An International Review, 27(2), 82-97.

Downloads

Published

2022-08-31

How to Cite

Ssekitoleko, P., & Musvoto, W. (2022). Empirical Linkages among Corporate Governance, Institutional Environment and Economic Growth in Sharia Law Countries. Acta Universitatis Danubius. Œconomica, 18(4). Retrieved from https://dj.univ-danubius.ro/index.php/AUDOE/article/view/1840

Issue

Section

Business Administration and Business Economics