initial public offerings in saudi arabia

419 Pages·2012·17.89 MB·English

INITIAL PUBLIC OFFERINGS IN SAUDI ARABIA:
MOTIVATIONS, BARRIERS, AND EFFECTS
M. Al-Barrak
Abdulrahman
BSc in Accounting, King Faisal University, Saudi Arabia
MS in Finance, University Colorado Denver, United State America
of at of
A in fulfilment
thesis the
submitted of requirement
for Degree Doctor Philosophy
the
of of
Department Accounting Finance
of and
Business School
University Newcastle Tyne
of upon
February, 2005
UNIVERSITY, LIBRARY
NEWCASTLE
-----------------------------
204 06171 8
----------------
------------
L-: '7
To
the of my mother
memory
Acknowledgments
I to Almighty Allah, the all knowledgeable and exalted in might, for guiding
am grateful
the to this
and giving me strength accomplish work.
Secondly, I like to thanks to Professor Tony
would express my sincere my supervisor,
during design,
Appleyard, for his the
sustained patience, support, and guidance execution,
I like King Faisal University,
and completion of this thesis. would also to thank my
fully in the UK.
employer, which sponsored my study
family. Without
Thirdly, the
endless thanks go to all members of my encouragement,
family father, brothers,
support, and understanding of my and especially my sisters, wife
little Sulaiman, I have thought this
and my son could not even about completing
dissertation. In their throughout the have been
addition, supports, period of research,
overwhelming.
is have
Fourthly, to
appreciation also extended other people who made valuable
dissertation: Saud Al-Sagi, Dr. Abdulrahman. Al-Barrak,
contributions to the my cousins
Ibrahim Al-Barrak, Abdulmohsan Al-Barrak, Thamer Al-Barrak, friends
and and my
Faisal Al-Hamdan, Mosead Al-Moosa, Saad Al-Hamlan, Sufian Al-Amer,
and who were
during data
very generous with their time the collection.
Last, but least, I the from
certainly not gratefully acknowledge co-operation my
King Faisal University the University Newcastle Tyne.
colleagues at and at of upon
ii
Abstract
This has taken the form field to
research of a study gather empirical evidence capable of
initial OPOs) in Saudi Arabia.
providing an overview of current public offerings
identify
The thrusts this thesis to the for
main of are: empirically motivations going
in Saudi Arabia; to find the barriers to in the Kingdom; to investigate
public going public
IPOs investigate
the the to
effects of on performance of companies; the
relationship
between increase in the IPOs to find
an number of and economic performance; which
kind likely in identify
to the to
of companies are more go public country, and some
increase IPOs in Saudi Arabia.
the
suggestions which could number of
To the the three Firstly, data
answer research questions, researcher undertook studies.
through that had IPO in
was collected a case study of a single company made an the
Kingdom. Financial ratio analysis was employed to capture the changes in the financial
before the IFO, two in-depth interviews
statements and after and were conducted with the
CEO financial to discuss the financial IDPO
company's and manager changes and other
issues. Secondly, data through The
more was gathered a comprehensive questionnaire.
in from
the taken the top the 500
sample studied questionnaire was management of
largest in Saudi Arabia. A total 145 from 7 different business
companies of companies
in Saudi Arabia in the This in
sectors participated study. represented a response rate
29%. Thirdly, data from interviews
three
excess of extra was obtained personal with
businessmen have taken their
well-experienced and educated who companies public.
iii
The results obtained from the single case study, the questionnaire, and the interviews
firstly, in Saudi Arabia in
showed that companies are motivated to go public order to use
the for to be
money raised more expansion and growth, more competitive, and to separate
the life from that the
company's of previous owners.
Secondly, with regard to the most important barriers to going public in the Kingdom, the
finds that fin-ns to because failure
the
study private are reluctant go public of of many
joint listed the Saudi Stock Market to because
stock companies on generate profit; of the
loss because the lengthy for Thirdly,
possible of control; and of procedure going public.
discovers
this that the
research also whereas most of questionnaire survey participants
believed that IPO decline the transition, by
performance would after and also confmned
the from the the interviewees thought that improve
results case study, performance would
the IPO.
after
Fourthly, to the ýPOs is
with regard effect of on economic conditions, there a great
between interviewees
the the
consensus questionnaire participants and all that
on an
increased IPOs in Saudi Arabia have favourable,
number of would a effect on economic
An increase in joint in Kingdom improve
the
welfare. stock companies would several
factors, foreign investment, balance
economic such as the growth rate, the of trade, and
the
unemployment rate.
Fifthly, finds
this that the
research also while most of questionnaire survey respondents
thought that by than investor large (in tenns
companies owned more one and companies
likely interviewees believed
to the that
of size) are more go public, most of companies
in industrial
to
working sector are more probably seek public equity.
iv
Sixthly, this finds that the in Saudi Arabia be
research rate of going public could
improved if fmancial
the govermnent creates a complete system, prepares clear
for for
that the the
guidelines explained procedures going public, and eases procedures
IPOs. The in Saudi Arabia be improved if decision
the
rate of going public also could
in firms from hire
makers private separate management ownership and professional
lead
to the
personnel companies.
In the that to
conclusion, study suggests since going public would add many advantages
increasing
firms, like financial trust,
strengthening position, public and attracting well
qualified personal, the flotation decision could solve some of the problems that the Saudi
has, finance,
private sector such as severe competition, poor management, constraints of
(lock family Nevertheless, the
and generation shift of succession and control). study also
IPOs that
confin-ris that would create new problems, especially of more restrictions on
transactions.
private
V
Table Contents
of
To i
th
em em ory of my m oth er
.............................................................................
Acknowledgments ii
.............................................................................................
Abstraet iii
*
0. ..................... 0.00 0,.................... **.. 0 .......... 06 $.. 0 400
Table Contents
of Vi
..............................................................................................
List Tahles
of xiv
...................................................................................................
List Figures
of xvii
................................................................................................
Chapter One: Introduction 1
................................................................................
1.1 Background 1
............................................................................................................
1.2 Statement the 5
of problem and primary research questions
..............................
1.3 Objectives 6
the
of study
..........................................................................................
1.4 The the 7
motives of study
........................................................................................
1.5 Thesis 7
progression and organisation
...................................................................
i
Chapter Two: SaudiArabian development 12
economic
...................................
2.1 Introduction 12
..........................................................................................................
2.2 The background the 13
economic and macroeconomic variables
.......................
2.2.1 Economic background 13
.......................................................................................
2.2.2 Macroeconomic 16
variables
..................................................................................
2.2.2.1 The domesticproduct (GDP) 17
gross
............................................................
2.2.2.2 The 18
unemployment rate
..............................................................................
2.2.2.3 Theforeign investment 19
...............................................................................
2.2.2.4 The inj7ation 20
rate
.......................................................................................
2.2.2.5 The balance 20
oftrade
..................................................................................
2.2.2.6 The interest 21
rate
.........................................................................................
2.3 The the to the 22
contribution of government economy
.......................................
2.3.1 Government initiatives to the the
policies and strengthen role of private
Saudi Stock Market (SSM) 22
the
sector and
........................................................
2.3.1.1 Privatisation 22
policies
.................................................................................
2.3.1.2 Supporting 25
small and medium scale enterprises
.........................................
2.3.1.3 Development 26
ofnon-oil exports
.................................................................
2.3.1.4 Improving investment 27
the regulatory and environment
..............................
2.3.2 Saudi Arabia's five-year development 28
plans
.....................................................
2.3.2.1 The direction 28
oftheplans
...........................................................................
2.3.2.2 Priorities development 32
of expenditure on
...................................................
Z3.2.3 Socio-economic 34
achievements
....................................................................
vi
2.4 The the to the Saudi 39
contribution of private sector economy
.........................
2.4.1 General background 39
...........................................................................................
2.4.2 Challenges facing
40
private sector
........................................................................
2.4.2.1 Generation
41
shift
.........................................................................................
2.4.2.2 Constraints
42
offinance
................................................................................
2.4.2.3 Saudisation
43
and employment
.....................................................................
2.4.2.4 International liberalisation
trade 43
and globalisation
: ***"*"*"***'*""*'**, *, *******
2.4.2.5 Constraintsfacing
45
small and medium scale enterprises
.............................
2.4.3 The in the 45
classification of companies private sector
........................................
2.5 Competition in Saudi Arabia 48
..............................................................................
2.5.1 Competitive the Saudi 48
advantages of nation
.....................................................
2.5.1.1 Domestically internationally 49
and competitive companies
...........................
2.5.1.2 Domestically 50
competitive companies
..........................................................
2.5.1.3 Unsuccessful 52
companies
............................................................................
2.5.2 Competitive Saudi Arabia Porter's 53
advantages of using model
.......................
2.5.2.1 Factor 54
conditions
.......................................................................................
2.5.2.2 Demand 57
conditions
....................................................................................
2.5.2.3 Related industries 59
and supporting
..............................................................
2.5.2.4 Company 60
strategies, structures, and rivalry
...............................................
2.6 Summary 62
...............................................................................................................
Chapter Three: The development Saudi Stock Market (SSM) 65
the
of
...........
3.1 Introduction 65
..... . ...................................................................................................
3.2 The Saudi Arabian Monetary Agency (SAMA) 66
...............................................
3.3 The 69
primary market
.............................................................................................
3.3.1 Cases
76
of privatisation
.........................................................................................
3.3.2 Cases
70
of going public
.........................................................................................
3.4 The
74
secondary market
.........................................................................................
3.4.1 The Share Negotiation System (SNS) 75
...............................................................
3.4.2 The Electronic Securities Information System (ESIS) 77
......................................
3.5 The SSM indices 79
...................................................................................................
3.5.1 The the SSM indices 79
calculation of
...................................................................
3.5.2 The the SSM 81
performance of
............................................................................
3.5.3 The the SSM 88
performance of sectors
................................................................
3.5.3.1 The banking 89
sector
....................................................................................
3.5.3.2 Yhe 91
agricultural sector
.............................................................................
3.5.3.3 The industrial 93
sector
.................................................................................
3.5.3.4 The 94
cement sector
.....................................................................................
3.5.3.5 The 94
service sector
.................................................................................... .
3.5.3.6 Yhe 95
electricity sector
................................................................................ .
3.5.3.7 The 95
telecommunication
sector
................................................................. .
3.6 The the JSCs 96
performance of
.............................................................................
3.7 The in the SSM 99
participants
...............................................................................
3.8 The the SSM 100
characteristics of
.........................................................................
3.9 The the SSM 102
efficiency of
..................................................................................
3.10 Summary 105
.............................................................................................................
vii
Chapter Four: Proceduresfor in Saudi Arabia 107
goingpublic
.....................
4.1 Introduction
107
........................................................................................................
4.2 The Companies Act 107
...........................................................................................
4.3 Procedures for in Saudi Arabia
108
going public
.................................................
4.3.1 Authorisation incorporate
to 110
...................................................................
4.3.2 The 112
prospectus
........................................................................................
4.3.3 Publication the 114
of prospectus
..................................................................
4.3.4 Distribution the Articles Association 114
of of
.............................................
4.4 General Company has its
117
regulations after a offered shares
........................
4.4.1 The Board Directors
117
of
...........................................................................
4.4.2 Stock
117
.......................................................................................................
4.4.3 Company
119
accounts
..................................................................................
4.4.4 The
120
auditor
..............................................................................................
4.4.5 Increase decrease in the the 121
and capital of corporation
..........................
4.4.6 The Income Tax Zakat Law 122
and
............................................................
4.4.7 Penalties 124
..................................................................................................
4.5 Summary 125
.............................................................................................................
Chapter Five: Literature 126
review
....................................................................
5.1 Introduction 126
........................................................................................................
5.2 The IPOs
127
performance of
..................................................................................
5.3 The benefits 143
motivations and of going public
.................................................
5.3.1 Growth
143
.............................................................................................................
5.3.2 Improving 147
credit rating
....................................................................................
5.3.3 Portfolio diversification liquidity I 148
and
....................................................
...........
5.3.4 Motivating
151
and monitoring management as well as employees
.....................
5.3.5 Enhancing image
152
company
..............................................................................
5.3.6 Investor
153
recognition
.........................................................................................
5.3.7 Acquisition
153
.......................................................................................................
5.3.8 Exploiting
154
mispricing
......................................................................................
5.3.9 Establishing for the firm 155
a value
......................................................................
5.3.10 Paying debt 156
off
.................................................................................................
5.4 The barriers the 157
and costs of going public
......................................................
5.4.1 Loss 158
of control
.................................................................................................
5.4.2 Adverse 159
selection
.............................................................................................
5.4.3 Agency Costs 162
...................................................... . ...........................................
5.4.4 Disclosure 165
........................................................................................................
5.4.5 Moral hazard
167
;
......................................... ..........................................................
5.4.6 Expenses fees 167
and
............................................................................................
5.5 The increased IPOs the 169
effect of an number of on economy
.........................
5.6 The IPOs 172
characteristics of
...............................................................................
5.7 Summary 175
.............................................................................................................
Chapter Six: The 178
research methodology
......................................................
6.1 Introduction 178
........................................................................................................
6.2 Research in 179
methods adopted similar studies
.................................................
viii
6.2.1 Primary data 179
.....................................................................................................
6.2.2 Secondary data 179
.................................................................................................
6.2.2.1 Reasonsfor data 180
using secondary
..........................................................
6.2.2.2 Disadvantages data 181
ofusing secondary
.................................................
6.3 Data techniques in this 182
collection used research
............................................
184
6.3.1 The
case study
..................................................................................................
6.3.1.1 Thefinancial test to the 186
used analyse company'sfinancial statements..
6.3.1.2 Thejustificationsfor the technique 189
using single case study
...................
6.3.2 The 190
questionnaire survey
.................................................................................
6.3.2.1 Advantages 191
the
of questionnaire survey
.................................................
6.3.2.2 Disadvantages 193
the
of questionnaire survey
............................................
6.3.2.3 Thejustificationsfor 195
the technique
using questionnaire
........................
6.3.2.4 Techniques to increase the 196
response rate
adopted
.................................
6.3.2.5 Questionnaire design 198
..............................................................................
6.3.2.6 The 200
pilot study
.........................................................................................
201
6.3.2.7 Thepopulation
the
and sample selected
.................................................
6.3.2.8 The tests to the data 202
statistical used analyse questionnaire
...................
6.3.3 The interview 203
technique
..................................................................................
204
6.3.3.1 Advantages the interview technique
of
...................................................
6.3.3.2 Disadvantages the interview technique 205
of
..............................................
206
6.3.3.3 TheJustifications the interview technique
of using
.................................
207
6.3.3.4 7he interviewees
......................................................................................
6.4 Validity 207
and reliability
.......................................................................................
208
6.4.1 Validity
............................................................................................................
6.4. LI Content 208
validity
.......................................................................................
6.4.1.2 Criterion4elated 209
validity
........................................................................
6.4.1.3 Construct 209
validity
....................................................................................
6.4.2 Reliability 210
.........................................................................................................
6.4.2.1 The 211
test-retest
method
.............................................................................
6.4.2.2 Theparallel-form 211
method
.......................................................................
6.4.2.3 Yhe 212
split-haýfmethod
..............................................................................
6.5 Summary 212
.............................................................................................................
Chapter Seven: The between
case study comparativefinancial analysis
-
b d IPO 214
th th
e years efore an after e
................................................................
7.1 Introduction 214
....................................................................................................... .
7.2 Company information 215
...................................................................................... .
215
7.2.1 Background
........................................... ........................................................ .
7.2.2 The initial 216
public offering process
.................................................................. .
in 217
7.2.3 The the
competition company's market
..................................................... .
7.2.4 Significant before the IPO 218
accounting policies and after
............................... .
7.2.5 The before the IPO 220
general economic situation and after
.............................. .
221
7.3 Results financial
of ratio analysis
.....................................................................
230
7.3.1 Profitability
ratios
........................................................................................... .
7.3.1.1 Gross (GPM) 230
tma
profi rgin
................................................................... .
7.3.1.2 Netprofit (NPM) 230
margin
....................................................................... .
ix