Saudi Arabia 2006 Market Crash: Structural, Regulatory, and Corporate Governance Analysis Essay Example

Saudi Arabia 2006 Market Crash: Structural, Regulatory, and Corporate Governance Analysis

Background to the Research Study

The Saudi Arabia stock market index fluctuated immensely prior to the crash. In 2005, the index was 16,712 but dropped to around 8,000 in 2006. In Dec 2003 and 2004, the stock index was 8,158. During the stock market crash period of 2006, the low in Index in the stock exchange was 7,500 while the peak was 20,966 (Capital Market Authority, 2016).Within these transactions, thousands received positive returns; others lost substantial amounts of savings, and these problems were compounded by cases of tragic deaths, family breakdowns, and social ailments.

Different entities are tasked with accomplishing different duties in advancing the economic position and also championing investor perception. However, the stock market crash affected many people and institutions, and it is important to review some of the reasons, which contributed to the occurrence of the problem. The deaths and losses reported during the period were large. Prevention of reoccurrence of the problem is important and would be achieved through carrying out the study. For example, understanding the laxities during the period would inform in creating frameworks and approaches to prevent the problem. In addition, the relevant institutions would be advised to formulate and implement appropriate measures to prevent the reoccurrence of the problem.

Research Questions

The following are the research questions:

  • Was there a laxity in implementation of the regulations?

  • Did behaviorist fundamentals and variables contributed to the stock market crash?

  • Did the different government agencies (institutions) play their roles accordingly?

Research Aims & Objectives

The following are the research aims and objectives:

  • Understand the market processes and procedures before the stock market problems

  • Analyze some contributing factors to the problem

  • The role of different institutions in contributing to the occurrence of the problem

  • What are measures that should be instituted to prevent reoccurrence of the problem

Literature Review

In 1985, the stock market had approximately 50 companies, and it doubled by 1995 but also reduced to 90 as of 2000 (Capital Market Authority, 2016). Currently, the companies are around 169 as of 1st January 2015. The companies are grouped into sectors, which include agricultural, insurance, telecom, electricity, service, cement and manufacturing (Capital Market Authority, 2016). The development of the different sectors is interlinked and contributes to defining investor perception. In addition, the success of the Saudi Telecom during the listing influenced the investors to continue acquiring the shares without critiquing the financial statements of the targeted companies.

Saudi Arabia Exchange also called TADAWELL is the Saudi Arabian stock exchange, and its activities are supervised by the Capital Market Authority. The stock exchange, The Tadawul All Share Index (TASI), reached the highest point in its history on 25 February 2006 at 20,634.86. The redefinition of the stock exchange market in 2003 resulted in the introduction of Saudi Telecom, and through information in themedia, investors bought without analyzing the market and the stock. Within the same period, more companies were listed, and people believed that the market was conducivetoinvestment (Abraham and Seyyed, 2006). However, the provision of information was skewed because of nature and educational conditions in Saudi Arabia. For example, most of the investors were the local and uneducated people meaning the investors were unable to critique the financial and strategic documents (Ghabayen, 2012). The role of CMA and Saudi Arabia Exchange is to disseminateinformation, but these institutions did not play their respective roles accordingly (Hasan, 2009). Hence, knowledgeof the stock remained with the creditors, suppliers, government, and other stakeholders, which were able to critique the documents but did not pass the information to the public. Therefore, investors without the right information suffered since these investors based their decisions on media euphoria.

CMA was established in 2003 and was assigned to oversee the operations at the stock market. However, the CMA did not implement or create anenvironment to ensure implementation of different regulations and legislations. Problems of fraudulent activities, lack of transparency and corporate failures contributed to the occurrence of the crash. The CMA was still new and lacked enough modalities and approaches to champion effective corporategovernance, but it is not an excuse because CMA had around three years to formulate and implement measures to sustain the requirements of the market. Moreover, the CMA was tasked with creating awareness and education for investors, anaspect that was not accomplished accordingly (Al-Matari et al. 2012). The corporate roles and responsibilities and their requirements in auditing and accounting were not integrated into the effectiveness of management of the market.

Regulations and standards were in place, but the effectiveness of these regulations and standards are still questionable. Fallatah and Dickins (2012) assert implementation of the regulation and roles also contributes to the occurrence of the problem. The ideology and frameworks in place including the psychological and behavioralcharacteristicswere worsened because of corporate failures and lack of strong governance. The regulation aspect should be viewed from different perspectives including the role of government agencies, the corporategovernance, the media, and the investor rationales in investments.

In making stock markets investments, numerous elements are brought together. The elements include timing of entry, sector analysis, fundamental market, technical stock analysis and estimations of returns. According to Balcilar, Demirer and Hammoudeh (2013), other elements also influence the decisions for investments and commonly affects the decision making process. For example, behavioral and psychological elements influence negatively the persons without appropriate knowledge and experiences on the market. Arouri, Lahiani and Nguyen (2011) states that rational and emotional decision making defines the decision making of some investors. Examples of emotional decision making is received from family members, and friends that talked about their successes in the stock market and investors decided to enter the market without effective decision making strategies (Abu-Musa 2010). The levels of literacy levels in Saudi Arabia are growing, but the literacy on financial matters were low meaning investors based their decisions on behavioral and psychological elements.

Research Methodology and Methods

The research will be done in Saudi Arabia and will target different institutions and stakeholders. The data will be obtained from the government agencies and the public: educated and uneducated individuals. The author will seek information from both remote areas and town areas provided the respondent had/has participated in the stock market transactions. Collecting such information will advance the argument of rational and emotions in investing in the stock market.

Both primary and secondary data will be collected. The secondary data will be retrieved from the government agencies and organizations’ financial statements. The data will be used to understand investor behavior, which would be reflected on the levels of investment through reviewing the number of shares bought prior to the financial crisis. The secondary data collected would be for the period 2003 to 2006 when the stock crash occurred. The analysis will also review regulations and legislative formulated to advance the requirements of transparency, prevention of fraudulent activities, and the roles and responsibilities of different stakeholders. Annual reports of the targeted companies will be used to determine whether there were internal processes and procedures that influenced stock market problems.

The primary data will be collected from the public. A research instrument will contain numerous questions ranging from educational backgrounds to response on the stock market crash. The aim is to ensure the respondents affected views are integrated into decision making process and creating an understanding of causes and effects of the stock market crash to avoid reoccurrence of the problem.

Stratified research approach will be used to collect the appropriate information. The information will be collected from persons who invested in the stock market. In addition, the information will be collected from the different stakeholders involved in the stock exchange. The information will be grouped into the different stakeholders’ roles and responsibilities, and their respective contribution to the stock market crash. Some of the stakeholders include the government agencies, the investors, the trader’s agencies and the relevant organization.

A questionnaire and interviews will be used in collecting the information. The questionnaire will contain diverse information based on the requirements of the study (Fallatah and Dickins, 2012). The researcher will either send the questionnaire to the targeted respondents or attend interviews depending on the significance and strengths of the targeted respondent. For example, interviews will be used in collecting information from government institutions: it includes face to face discussions with the management of the government institutions. On the other hand, questionnaires will be send to the respondents to be filled and then, the respondents will mail back the filled questionnaires.

Different statistical tools will be used to analyze the data. Since the data will be voluminous, stratification and grouping of the data will be appropriate for arriving at informed conclusions. The common software used in data analysis will be Microsoft Excel Software, and alternative statistical software will be used depending on the nature of collected data.

Further Clarification of the Research Methodology

The targeted company is Saudi Telecom Group that contributed to the understanding of the stock exchange and many investors bought the shares of the company. The second company is the Bishah Agricultural Development Company that deals in agricultural processes, and was suspended after the 2006 stock crash. The two institutions that would be analyzed are the Saudi Arabia Stock Exchange and the Capital Market Authority. Capital Market Authority supervises the operations of the stock exchange and understanding its roles and responsibilities during this period is important.

Different type of information will be gathered depending on the role of the institution or company towards addressing regulatory requirements and also investor expectation. In terms of institution (government), review will be done to determine whether the institution play its roles and responsibilities accordingly. For example, were the regulations implemented accordingly and whether there were challenges/inefficiencies? In the case of companies, the presentation of financial information including financial statements will be analyzed to determine whether it conforms to existing standards. The stock prices of these companies will also be analyzed and significance of financial changes. The study will trace the functions of the companies in terms of financial statements and analysis for the periods 2000 to 2007. Hence, the financial data and other disclosures will be analyzed to understand the contributing factors resulting in the crash.

Some of the information that will be collected from the annual report includes profitability/loss, financial ratios, analysis of dividend policy, and variables that influences the stock prices. In addition, the disclosures/level of disclosures would be obtained from the annual report. These different data would enable understanding the transparency and level of adherence to regulatory requirements.

The information from investors is important in understanding the factors contributing to the stock market problems, and the information will be obtained through the use of a questionnaire. The question will contain different information targeted to the investors based on numerous financial analysis requirements. Some of the information includes the source of information in making decisions on what type of shares to acquire, the amount of shares, and the companies. Additional information would include whether they made any positive returns/negative returns, and aftermath of the situation/transaction.

Analyzing the information whether from the investors or the institution enables understanding the circumstances resulting in the financial crisis. It enables identifications and creation of frameworks to prevent reoccurrence of the problem. For example, information from the investors will provide data on their approach in acquiring shares while the information from the regulatory institutions will identify any shortcoming.

Timeline

Activity

Literature search (Confirm gap)

Draft Research Question/Topic

Scope out research (thesis plan)

Draft Bibliography

Reading (secondary literature)

Draft Literature Review

Feedback on Literature Review

Draft Introduction

Feedback on Introduction

Draft middle chapters

Feedback on middle chapters

Draft final chapters

Methodology

Designing questionnaire

Collecting data from respondents

Collecting data from government

Analyzing the data

Correlating the data

Writing up

Feedback on methodology

Feedback on remaining chapters

Complete all chapters

Complete introduction

Draft conclusion

Feedback on conclusion

Complete conclusion

Complete bibliography

Write abstract/acknowledgements

Proofreading

Printing and binding

Submission

References

Abraham, A. and Seyyed, F.J., 2006. Information transmission between the Gulf equity markets of Saudi Arabia and Bahrain. Research in International Business and Finance, 20(3), pp.276-285.

Abu-Musa, A., 2010. Information security governance in Saudi organizations: an empirical study. Information Management & Computer Security, 18(4), pp.226-276.

Al-Matari, Y.A., Al-Swidi, A.K., Fadzil, F.H.B., Fadzil, H. and Al-Matari, E.M., 2012. Board of Directors, Audit Committee Characteristics and the Performance of Saudi Arabia Listed Companies. International Review of Management and Marketing, 2(4), p.241.

Arouri, M.E.H., Lahiani, A. and Nguyen, D.K., 2011. Return and volatility transmission between world oil prices and stock markets of the GCC countries. Economic Modelling, 28(4), pp.1815-1825.

Balcilar, M., Demirer, R. and Hammoudeh, S., 2013. Investor herds and regime-switching: Evidence from Gulf Arab stock markets. Journal of International Financial Markets, Institutions and Money, 23, pp.295-321.

Capital Market Authority. (2016). Homepage. Retrieved from http://www.cma.org.sa/En/Pages/home.aspx

Fallatah, Y. and Dickins, D., 2012. Corporate governance and firm performance and value in Saudi Arabia. African Journal of Business Management, 6(36), p.10025.

Fallatah, Y. and Dickins, D., 2012. Corporate governance and firm performance and value in Saudi Arabia. African Journal of Business Management, 6(36), p.10025.

Ghabayen, M.A., 2012. Board characteristics and firm performance: Case of Saudi Arabia. International Journal of Accounting and Financial Reporting, 2(2), p.168.

Hasan, Z.B., 2009. Regulatory framework of Shari’ah governance system in Malaysia, GCC Countries and the UK. Kyoto Bulletin of Islamic Area Studies, pp.3-2.

Safieddine, A., 2009. Islamic financial institutions and corporate governance: New insights for agency theory. Corporate Governance: An International Review, 17(2), pp.142-158.

Samaha, K., Dahawy, K., Hussainey, K. and Stapleton, P., 2012. The extent of corporate governance disclosure and its determinants in a developing market: The case of Egypt. Advances in Accounting, 28(1), pp.168-178.