Finance Assignment Harvard Case Solution & Analysis

INTRODUCTION

                Saudi Arabia is known as the oil-producing kingdom of the world. The stock market of Saudi Arabia had been off limit for the foreigners since its emergence. Many powerful companies are listed on the Saudi stock exchange known as Tadawul. These powerful companies are also leading players in the world such as the Saudi Basic Industries Corporation is also listed on the Saudi Stock exchange. The latest news is that, the Saudi government is to open the stock market to the foreign investors next year in 2015. This would be one of the world’s greatest economic reforms in the history of this top oil-exporting nation.

                Now the Saudi stock market will allow the foreign investors to sell and buy the shares in this stock market. The stock market would be open to the eligible foreign financial institutions and they would be able to invest in their desired stocks. They will be able to invest in the stocks during the first half of the year 2015. Previously the foreign financial institutions and other investors could invest in the Saudi stock market only through the financial instruments such as the exchange traded funds or through the swap contracts. These investors included all the investors outside Kuwait, Bahrain, Qatar, Oman, Saudi Arabia and the United Arab Emirates. However, now all such investors would be able to invest in the Saudi stock exchange directly. There are almost billions of dollars in the foreign reserves and the government wants now to open the stock market too all foreign investors so as to diversify the economy outside the oil sector, create more jobs and expose all the small and large firms to all the international business standards.

                This report focuses on the relative corporate governance, stockholder returns, capital structure, risk and dividend policy of two companies in the same industry. The two companies chosen are the Saudi Telecom Company and the Emirates Integrated Telecommunications Company. Each and every part has been analyzed in this report and all the relevant workings and references have been mentioned in the case.

The kingdom has hundreds of billions of dollars in foreign reserves and is thought to want to open the stock market to create jobs, diversify the economy beyond oil, and expose local firms to international business standards. They have been preparing the reform for years but have reportedly delayed implementation, apparently concerned about the political sensitivity of allowing foreigners to accumulate large stakes in Saudi companies.

LITERATURE REVIEW

CORPORATE GOVERNANCE

     Since the beginning, many leading companies such as Enron and WorldCom have collapsed as a result of poor management practices, weak internal controls and poor management structures. There are many other reasons that led to the collapse of such companies. This was the time when corporate governance was emerged. Corporate governance is the best practice for the companies to implement. This system comprises of two mechanisms, external and internal corporate governance. The internal corporate governance related to the internal part focuses on the primary interests of all the shareholders of the company and monitoring the activities of the top management is the core responsibility of the board of directors. There is a strong relationship between corporate governance and the firm performance.

    Veliyath (1999) stated that the bridge between the managers and the owners of the company are the board of the directors. It is their duty to monitor and take steps in the best interest of the shareholders of the company. On the other hand, Jensen (1993), states that the opinions of the directors will always vary especially when the number of the directors increases so consensus is difficult (Lipton and Lorsch, 1992). On the other hand, Bacon (1973), states that the larger the size of the board, the more viewpoints are gathered and the quality of the decision making improves. Another important view point with regard to the impact of corporate governance on firm performance is that, according to the agency theory, when the role of the CEO is also assumed by the chairman of the company, and acts as a decision maker and the supervisor at the same time, the performance of the company goes down in the end.....................

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