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Article

Ownership Structure and Financial Sustainability of Saudi Listed Firms

by
Mohammed Naif Alshareef
Department of Accounting, College of Business, Umm-Al-Qura University, Makkah P.O. Box 714, Saudi Arabia
Sustainability 2024, 16(9), 3773; https://doi.org/10.3390/su16093773
Submission received: 26 March 2024 / Revised: 18 April 2024 / Accepted: 24 April 2024 / Published: 30 April 2024
(This article belongs to the Special Issue Corporate Governance, Performance and Sustainable Growth)
Versions Notes

Abstract

:
This research assesses the impact of ownership structure on financial sustainability. Panel data from 102 Saudi non-financial listed firms covering 2013 to 2022 were analysed using OLS and fixed effects methods. Further, the GMM was employed to check for robustness. The research outcomes reveal the strong and positive effects of institutional ownership and family shareholding on financial sustainability. This positive impact implies that robust and stringent monitoring of family shareholding and institutional investors may neutralise managerial entrenchment, reduce agency costs and pave the way for financial sustainability. However, government ownership appears insignificant, while managerial ownership exerts a strong negative influence on financial sustainability. The negative effect suggests that managerial shareholding may be counterproductive to organisational efficiency. Importantly, the outcomes look consistent using several econometric models. Therefore, the research findings may further shape policymakers’ understanding of how the diverse monitoring strategies of ownership structure influence financial sustainability. Also, the results may serve as an incentive for managers and standard setters to support firms in embracing institutional and family shareholding. The presence of these shareholders may minimise agency conflicts and maximise firm value for sustainable profitability.

1. Introduction

Corporate bodies increasingly understand that they should consider how their business operations may impact society and the environment [1,2]. Also, rating agencies are now evaluating firms more comprehensively based on their impact on society and the environment [3]. Socially and environmentally friendly practices may enhance corporate reputation and legitimacy [4]. More importantly, there is a growing concern that managers need to be persuaded so that they pay more attention to sustainability practices. Specifically, studies have found that higher compensation may make managers develop socially and environmentally friendly policies [5,6]. This implies that firms need to motivate and encourage managers for greater involvement in sustainability activities.
One aspect of corporate sustainability is financial sustainability, which is gaining much attention because of its signalling effects [1,7]. In addition, researchers have argued that sustainable growth is an essential determinant of financial sustainability [8,9,10]. Accordingly, it is emphasised that sustainable growth and financial sustainability focus on long-term value creation and steady income generation to meet the needs of diverse stakeholders [8,11]. Financial sustainability is defined as the ability of a firm to generate positive outcomes that not only cover costs but also accelerate firm growth [12,13,14]. Given the above reasons, financial sustainability can be measured using a sustainable growth model.
Additionally, studies have argued that sustainable performance signals firms’ governance quality to the public [2,15]. Also, it is argued that sustainable performance can minimise the potential agency conflicts between shareholders and managers, thereby attracting more investors [16,17]. Thus, in the contemporary business discourse, analysts, academics and policymakers have engaged in extensive discussions regarding the determinants of financial sustainability due to its linkage to business survival [18,19].
Prior studies on the determinants of sustainability performance largely focused on board-related attributes and overlooked the ownership structure dimension [1,2,3,4,16,20]. Likewise, the existing studies mainly utilised sustainability disclosure, including environmental and social components, hence ignoring the financial sustainability aspect despite being the pillar upon which other sustainable practices rely [13,21,22]. Importantly, it is established that the ownership structure may serve as a crucial mechanism for enhancing organisational outcomes. Corporate owners have the incentives and ability to monitor management closely and influence firms’ decisions using their voting power. In addition, studies have argued that ownership structure monitoring may mitigate managerial entrenchment, reduce agency conflicts and raise firm value for sustainable performance. Therefore, this study’s aim is to explore the effect of ownership structure on the financial sustainability of Saudi non-financial listed firms.
This study makes substantial contributions to the literature. Firstly, this study addresses a key gap in the literature by analysing ownership structure as a determinant of financial sustainability, which prior studies ignored. Hence, the evidence introduces new ideas to the corporate governance literature by unveiling a fresh perspective on corporate sustainability. The research findings indicate that institutional ownership and family shareholding may enhance financial sustainability. Secondly, this outcome adds to the corporate governance literature on how different ownership attributes may determine organisational efficiency and long-term value creation. Thirdly, the research offers additional analysis using GMM, which may enable control of time effects and heteroscedasticity, thereby providing more reliable results. Fourthly, the research outcome may pave the way for authorities to encourage firms to embrace more institutional and family shareholdings for great monitoring and corporate governance compliance for sustainable performance.
The other parts of this paper are as follows: The Section 2 concentrates on a brief remark on the research context, followed by a literature review and the method. The next section presents the primary regression and robustness test, followed by the conclusion.

2. Institutional Context

This research concentrates on Saudi Arabia for several reasons. Firstly, the nation derives most of its foreign exchange from crude oil sales. Further, studies predicted that the nation supplies significant crude oil to the global market [23]. This giant contribution makes the Saudi economy important for world economic growth. The stock market in Saudi seems to be the most liquid and largest among Middle Eastern nations [9,24]. Thus, the corporate governance practices in the economy may interest investors globally. The corporate sector in Saudi is undergoing reforms that may boost the country’s revenue and attract foreign direct investment to achieve its Vision 2030 [22,25]. This growth strategy may rescue Saudi Arabia from a substantial reliance on crude oil income. Therefore, sustainable performance in Saudi firms may be of great concern to regulators and authorities. Also, an additional peculiarity of the country’s corporate sector is that family shareholding is dominant, and there is a low level of institutional shareholding [9,22]. The prevalence of family ownership may influence board compositions and their effectiveness, thereby affecting organisational efficiency and long-term value creation. Consequently, examining the relationship between ownership structure attributes and financial sustainability may provide further insights to the literature and for policy decisions.

3. Underpinning Theories

Some theories may serve as a background for understanding the connection between corporate ownership structure and financial sustainability. One such framework is agency theory. The theory assumes that firms have inherent information asymmetry due to the separation between corporate ownership and control [26,27,28]. Given this separation, the theory predicts that managers may act opportunistically, which may be contrary to shareholders’ wishes [29,30]. Thus, the agency theory concludes that modern firms may suffer from agency conflicts, which may erode shareholder wealth if not handled effectively [31,32]. The theory suggest that the ownership structure may serve as one of such control mechanisms that can monitor managers’ actions and evaluate their policy decisions [33,34]. Financial sustainability focuses on tapping sufficient revenue to meet future financial obligations. Therefore, stringent supervision from ownership may compel managers to pursue decisions that could ensure long-term firm value, leading to sustainable performance [35,36,37].
Secondly, the stakeholder framework may equally provide theoretical backing to this discussion. The theory examines management values and ethical practices in organisational settings [38,39]. According to this view, management should factor firms’ stakeholders into decision making because they may contribute significantly toward achieving corporate goals [1,40,41,42]. Among the stakeholders that this framework recognises is the ownership structure. Firms’ owners should encourage managers to partake in sustainability practices, which can improve corporate image and legitimacy [11,38]. This, in turn, may boost firm value and promote sustainable performance.
Also, the stewardship perspective may be used in this context. This theory argues that managers have the confidence and incentives to manage organisational resources prudently [43,44]. They can exercise due diligence and have the expertise to design and implement sound decisions that maximise corporate performance [45,46]. Thus, this theory concludes that shareholders should extend the needed support to managers for long-term value creation [11,47]. The signalling perspective may also be employed to view the theoretical background of the impact of ownership structure on financial sustainability. This framework emphasises reducing the information disparity between managers and shareholders due to the separation between ownership and organisational control [48,49]. According to this view, financial sustainability is a crucial mechanism that can reduce agency conflict between managers and owners, leading to lower information disparity [50,51]. In addition, the theory suggests that sustainable performance conveys good news about a firm’s internal governance quality to the external environment [49,52]. This sound performance may raise a firm’s reputation and legitimacy. Thus, sustainable performance is an effective tool that signals that a firm has stable earnings and track records [51,53,54]. This positive signal may assure shareholders that their investment value can be maximised.

4. Empirical Review

4.1. Institutional Ownership

Studies have investigated the role of institutional ownership in influencing corporate governance practices. These investors are typically from the banking sector and allied institutions, such as insurance firms, mutual funds and pension units [55,56]. They possess sophisticated financial expertise and management skills and aim to maximise their investment value [51,57]. A strand of the literature suggests that institutional investors may intensely monitor managers’ decisions due to their specialised knowledge [58]. Based on this declaration, the literature suggests that firms with a considerable institutional shareholding may have lower agency conflicts [56]. This lower agency conflict may help narrow the potential information asymmetry between owners and management, leading to higher firm value. Also, some studies emphasised that stringent monitoring strategies from these owners may mitigate earning management practices and neutralise managers’ opportunities attitude [34,45]. This has improved organisational efficiency in terms of higher-quality decisions, which may maximise firm value.
Moreover, it is stated that institutional investors prefer investing in companies with a sound management culture [59]. Hence, they usually exert intense pressure on the management of their investee firms to embrace high social and environmental disclosure to meet the diverse interests of firms’ stakeholders. Therefore, studies have argued that institutional ownership may positively influence financial sustainability, since these investors have long-term investment horizons [3,20,60]. Overall, one may presume that the presence of institutional investors can shape firms’ decision quality, reduce operational risks and enhance sustainable performance. Given these ideas, the following prediction is made:
H1: 
Institutional ownership is positively related to the financial sustainability of Saudi listed companies.

4.2. Family Ownership

This is another dimension of corporate control commonly found in developed and emerging nations. Studies have reported that the main target of family firms is to preserve their identity, enhance their reputations and maximise their investment [61,62]. They want to retain corporate control and influence key decisions that have bearings on their goodwill and profit enhancement motive [34,63]. They usually appoint their close relatives to strategic positions to ensure that board-level policy decisions favour them [37,64]. Therefore, the literature shows that they have the incentives and ability to closely monitor managers, which may limit managerial discretion [36]. Also, it is argued that family companies may be associated with high disclosure practices to showcase their governance quality and signal their integrity to the external environment [32,37]. Given that, empirical evidence suggests that the exceptional motive and stringent monitoring from these investors may shape firms’ internal governance [34]. Hence, it is argued that family-owned companies may have fewer agency conflicts, lower operational risks and higher firm value for sustainable growth [7,18].
In contrast, a strand of the literature stresses that family-controlled firms may have a higher incidence of infringement of minority shareholders’ interests [63,65]. Also, their influence over key board appointments in favour of their relatives may weaken board decision quality [21,50]. These instances may exacerbate another version of agency conflicts between minority and controlling family owners. This circumstance may lower firm value and negatively affect sustainable performance. Based on these conflicting views, we present the following hypothesis:
H2: 
Family shareholding may influence the financial sustainability of Saudi listed firms.

4.3. Government Ownership

Government ownership may also influence organisational efficiency. Organisations with substantial government shareholding may draw and win government aid and better advice for developmental purposes [13,50]. In particular, government-controlled companies may have a higher chance of securing valuable resources, subsidies, contracts and tax rebates [32,33]. Also, it is argued that firms with concentrated government shareholding may be associated with robust supervision that may compel managers to disclose vital information for public interest and to raise government image [66,67,68]. These advantages may enable government-owned firms to reduce the cost of capital, be more financially stable and pave the way for financial sustainability [14,69].
However, a segment of the literature emphasises that firms with concentrated state ownership may suffer from weaker internal control mechanisms due to ineffective monitoring by the government [33,70]. Further, it is reported that these firms may be more obliged to serve the public interest rather than just shareholders’ interests [32,71]. More often, the public interest may conflict with firm value maximisation. In this way, firms with concentrated government shareholding may have a higher incidence of managerial entrenchment. Managers in these firms might not be subjected to pressure from stakeholders due to greater access to resources from the state at their disposal [33,70]. These instances may erode financial performance and constrain sustainable growth. Given these arguments, the following prediction is made:
H3: 
Government ownership is directly linked to the financial sustainability of Saudi listed firms.

4.4. Managerial Ownership

The agency literature suggests that managerial ownership is an essential mechanism for reducing agency costs and enhancing firms’ internal governance [47,72]. Specifically, it is reported that this shareholding may promote organisational value because it allows managers to have a stake in the firms they are managing [59,73]. Hence, it may give them incentives to design and implement policies that can boost firm performance [28,74]. Likewise, a some studies have emphasised that managerial shareholding may raise firm value because the incidence of earning management practices and entrenchment motives may be lower [32,75]. This may assist in aligning the interests of shareholders with those of managers, reducing agency conflicts and promoting long-term value creation for sustainable growth [73,76].
In contrast, some studies have argued that higher managerial shareholding may be counterproductive to organisational efficiency [77,78]. Substantial managerial ownership may lead to opportunistic behaviour, entrenched attitudes and making managers have discretion over firm policies [74,79]. These instances may weaken board monitoring ability, fuel agency conflicts and adversely affect sustainable performance. Given these discussions, the following hypothesis is formulated:
H4: 
Managerial shareholding is associated with the financial sustainability of Saudi listed firms.

5. Research Approach

5.1. Data Sources and Sample

In this research, we sourced corporate governance data from the sampled companies’ published annual reports and accounts. Also, the Tadawul Stock Exchange (Saudi) website and Eikon data stream were utilised to gather firm-level data. The research period ranged from 2013 to 2022, which was the most current period for which firms’ annual financial statements are available when carrying out this study. Further, the sample size is drawn from 219 firms operating in the Saudi non-financial sector. The sample covers 102 firms after dropping firms in the financial industry because of their peculiar operating system and regulations [1,80]. Similarly, firms with incomplete and missing information were also sorted out. Thus, the final sample covers 1020 firm-year observations of the Saudi non-financial listed firms.

5.2. Description of the Variables

5.2.1. Dependent Variable

The dependent variable is financial sustainability. This work adopts Higgins’s (1977) growth model as a measure of financial sustainability. A substantial number of studies reported that financial sustainability is the ability of a firm to generate positive outcomes that not only cover costs but also accelerate firm growth [21,22]. This model is widely used in the accounting and finance literature to measure firms’ financial sustainability because it suggests synergy between firms’ growth objectives and financial policies [10,13]. In addition, studies have argued that sustainable growth is an essential determinant of financial sustainability [8,9,10]. Accordingly, it is emphasised that sustainable growth and financial sustainability focus on long-term value creation and steady income generation to meet the needs of diverse stakeholders [8,11]. According to this view, the absence of this synergy may worsen firms’ financial conditions, leading to unsustainable performance and corporate failure [10,12]. The model is given as follows:
S G R % = P M ∗ A T ∗ F L ∗ E R R
where SGR = sustainable growth rate, PM = profit margin (net income after tax/revenue), AT = assets turnover (revenue/total assets), FL = financial leverage (total debt/total assets) and ERR = earnings retention rate (retained earnings/net income after tax).

5.2.2. Explanatory Variable

The independent variable is ownership structure. The inspiration for testing corporate ownership’s monitoring capacity is rooted in the agency theory. This theory states that ownership might positively influence firms’ internal governance due to its incentive and ability to monitor managers effectively [65,81,82]. Such effectiveness may empower management to design policies that could ensure financial sustainability. We measured ownership structure using four proxies. The first proxy is institutional ownership (IO), which was determined as the percentage of shares held by institutions [51,58], followed by family ownership and measured as the number of shares held by families over total common stock [32,83]. Likewise, we employed government ownership, determined as the number of government shares over total equity stock [32,66]. The last proxy is managerial ownership, computed as the percentage of shares held by managers [32,73].

5.2.3. Control Variables

Furthermore, this study employed some control variables to avoid misspecification bias and make the model more robust. These variables are firm size (SIZE), leverage (TD), firm age (FAGE), board size (BS) and board independence (BI). The literature reports that these variables may affect firms’ financial sustainability [1,3,4,10,21,22]. Firm size (SIZE) was measured as the logarithms of the sampled companies’ total assets. The total assets measure the total resources of a firm [1,84]. Financial sustainability focuses on using firms’ assets to generate steady income and long-term value enhancement for the benefit of all stakeholders [21,85]. Therefore, measuring firm size using total assets seems more appropriate in this context. In addition, the total asset values were transformed into log form to mitigate the high skewness of firm size data [84].
Leverage (TD) was computed as total debts over total assets [30,37]. FAGE was determined as the number of years a firm has been listed [86,87]. BS is the total number of directors, while BI was calculated as the number of independent directors over total board members [65,82,88]. In addition, industry and time dummies were included in the specified models to control time and industry effects. Including these dummies may enable this research to account for industry and time effects because the sample comprises firms in different industries over multiple periods.

5.3. Analytical Method

This study employs a panel data approach to achieve the research objective. The method seems more appropriate since the research sample covers 102 firms over ten (10) years. In addition, the panel data approach involves an examination of different units for many periods [23,32]. It is argued that this technique improves the efficiency of economic estimates because it produces more data points and minimises multicollinearity issues [48]. The panel data analytical framework widely used in accounting and finance studies includes pooled OLS, fixed effect and random effect methods [48,51]. This study employed the Hausman test to determine a more appropriate analytical framework between fixed and random effects. The p-value of the Hauman specification looks significant, which supports the suitability of the fixed effects technique over random effects [89,90]. Therefore, this study reports the results of OLS and fixed effects techniques. The general forms of these models are given as:
Y i t = ∅ + β δ i t + ε i t
Y i t = ∅ + β δ i t + μ i + ε i t
where Y on the left-hand side denotes a criterion variable, ∅ is the regression intercept, δ i t is the vector of the explanatory variables, μ i is the firm fixed effect and the error term is denoted as ε i t , while i and t denote the cross-sectional and time-series components, respectively.

6. Results and Explanations

The presentation and discussion of the empirical results begin with summary statistics in Table 1, then correlation analysis displayed in Table 2, followed by diagnostic tests in Table 3. The main regression results and robustness analysis are shown in Table 4 and the last table, respectively.

6.1. Descriptive Analysis

Table 1 reports the summary statistics of the variables. Based on the results, financial sustainability (FS) exhibits a mean of 9.07 and shows a wide margin across the sampled firms, with a lower and higher value of −0.23 and 89.21, respectively. The institutional ownership ratio indicates 0.02, signifying that, on average, 2% of the firms’ total equity shares are held by institutions within this period. On average, the family ownership ratio is 0.12, suggesting that families own 12% of the firms’ common stock. On average, government ownership (GO) and managerial ownership (MO) register a maximum ratio of 0.91 and 0.74, respectively. As the SIZE shows, the sampled firms seem to be of different sizes relative to their fixed investment capacity. The firms’ leverage ratio (TD) exhibits 0.22 on average, indicating that debt constitutes 22% of their total capital.
Table 1. Descriptive statistics.
Table 1. Descriptive statistics.
VariableFSIOFOGOMOSIZETDFAGEBSBI
Mean 9.070.020.120.080.099.340.228.315.690.43
Max.89.210.660.840.910.7414.060.8722.0011.000.90
Min.−0.230.000.000.000.005.370.001.003.000.11
Std. Dev.16.130.090.180.170.160.780.213.711.680.17
Obs.1020102010201020102010201020102010201020
Note: FS = financial sustainability, IO = institutional ownership, FO = family ownership, GO = government ownership, MO = managerial ownership, SIZE = firm size, TD = leverage, FAGE = firm age, BS = board size and BI = board independence.
Moreover, firm age (AGE) ranges from 1 to 22 years, with a high margin among the studied firms. The total number of board members (BS) suggests that Saudi corporate boards have about six (6) directors on average, with a maximum of eleven (11) directors. The statistics reveal that independent directors constitute about 43% of the total board members, with a slight margin among the sampled firms.

6.2. Correlation Results

Table 2 shows the Pearson correlation results. The aim is to determine the degree of association between the study variables to detect multicollinearity in the specified models. The literature suggests that multicollinearity exists when the degree of association between explanatory variables is above 80 per cent [48]. The outcome in Table 2 reveals that none of the coefficients of the explanatory variables reached 80 per cent. Also, the VIF values are within the acceptable range. Thus, the multicollinearity problem is not an issue in the specified models.
Table 2. Correlation matrix.
Table 2. Correlation matrix.
Variable FSIOFOGOMOSIZETDFAGEBSBIVIF
FS1.000
IO0.076 b1.000 1.18
FO0.081 a−0.080 b1.000 1.17
GO0.131 a−0.089 a−0.104 a1.000 1.82
MO0.031−0.126 a−0.064 b−0.217 a1.000 1.27
SIZE−0.0060.135 a−0.0260.512 a−0.0031.000 1.93
TD−0.103 a0.122 a−0.059 c0.110 a0.0040.387 a1.000 1.26
FAGE−0.0270.065 b−0.0400.104 a−0.059 c0.115 a0.051 c1.000 1.22
BS0.417 a−0.0450.076 b0.096 a0.0490.014−0.075 b0.0221.000 1.21
BI0.540 a0.136 a−0.0540.125 a0.151 a−0.013−0.097 a−0.057 c0.1031.0001.29
a, b & c demonstrate significance at 1%, 5% and 10%, respectively. Note: FS = financial sustainability, IO = institutional ownership, FO = family ownership, GO = government ownership, MO = managerial ownership, SIZE = firm size, TD = leverage, FAGE = firm age, BS = board size and BI = board independence.

6.3. Regression Analysis

Several tests were undertaken to diagnose the sampled data so that appropriate statistical treatment could be applied to address abnormalities inherent in panel data. Diagnostic tests, such as VIF, serial correlation and heteroscedasticity, were carried out. The VIF values obtained ranged from 1.17 to 1.93, demonstrating the absence of multicollinearity [90,91]. However, the study model exhibits serial correlation and heteroscedasticity, as shown in Table 3.
Table 3. Diagnostic tests.
Table 3. Diagnostic tests.
TestResults
Heteroscedasticity
(Breusch/Cook test)		Chi2 (1) = 24.44
Prob > chi2 = 0.0000
Serial correlation
(Wooldridge test for autocorrelation in panel)		F = 13.993
Prob > F = 0.0003
Given the outcome of the diagnostic tests in Table 3, it is apparent that the data are associated with heteroscedasticity and serial correlation. In this regard, the literature suggests that clustered (robust) regression can be applied to correct these statistical issues [34,48,55,92]. Therefore, in this study, we applied this statistical treatment in order to generate more consistent and reliable empirical estimates.
Table 4. Regression results.
Table 4. Regression results.
Model 1
(OLS Estimator-Robust)		Model 2
(Within Groups Estimator-Robust)
VariablesCoef./Std. ErrCoef./Std. Err.
Constant 19.7212 (7.2121) ***1.1990 (0.5710) **
IO6.3071 (3.1342) **1.4110 (0.5076) ***
FO8.5718 (3.4056) **5.9133 (2.9419) **
GO−6.6426 (4.8013) −4.3933 (4.8762)
MO−8.2537 (2.6909) ***−2.1950 (1.8154) **
SIZE0.6884 (0.3824) *0.4131 (0.4132) *
TD−3.6361 (2.5884)−1.4890 (2.6305)
FAGE0.1029 (0.1277)0.1282 (0.1025)
BS−3.1306 (0.2971) ***1.8361 (0.3594) ***
BI42.3679 (2.9724) ***11.0421 (3.2945) ***
Industry dummiesYesYes
Year dummiesYesYes
Adjusted R20.38000.5461
F. statistics44.95124.46
Prob. F-statistics0.0000.000
***, ** & * demonstrate significance at 1%, 5% and 10%, respectively. Numbers in parenthesis are standard errors robust to heteroscedasticity. Note: FS = financial sustainability, IO = institutional ownership, FO = family ownership, GO = government ownership, MO = managerial ownership, SIZE = firm size, TD = leverage, FAGE = firm age, BS = board size and BI = board independence.
The regression results on the link between ownership structure and financial sustainability using OLS and fixed effects are shown in Table 4. The OLS results bear model (1), whereas model (2) contains fixed effect estimates. According to the outcome in both models, institutional ownership is significantly and positively associated with financial sustainability, confirming H1. This evidence suggests that as institutional shareholding rises, financial sustainability may increase. This finding aligns with the arguments that institutional investors possess sophisticated financial expertise and management skills [51,57]. They may vigorously monitor the managers’ decisions due to their specialised knowledge [58]. This enhanced monitoring may lower agency conflict and neutralise managers’ opportunities attitude, leading to organisational efficiency in terms of higher-quality decisions that can promote long-term creation [34,45]. The coefficient of family ownership indicates a positive and significant sign, consistent with H2. This result implies that sustainable performance may rise as family ownership increases. The evidence supports the conjecture that the main target of family firms is to preserve their identity, enhance reputations and maximise their investment [34,61,62,63]. These shareholders may have the incentives and ability to closely monitor managers, which may limit managerial discretion [32,37]. Thus, their stringent monitoring may lead to fewer agency conflicts, lower operational risks and higher firm value for sustainable growth [7,18].
Regarding government ownership, the results show an insignificant negative effect in both models, refuting H3. This suggests that government shareholding may not necessarily improve financial sustainability in the Saudi context. Given the country’s institutional structure, government ownership monitoring may be less effective. This outcome seems to align with the arguments that firms with concentrated government shareholding may be associated with a higher incidence of managerial entrenchment [33,70]. This scenario may weaken the effect of government monitoring, leading to this insignificant effect. However, managerial ownership has a strong negative impact on financial sustainability, supporting H4. This result means that as managerial shareholding rises, financial sustainability may decrease. This outcome supports the conclusion that a higher level of managerial shareholding may be counterproductive to organisational efficiency [77,78]. Further, substantial managerial ownership may lead to opportunistic behaviour, entrenched attitudes and making managers have discretion over firms’ policies [74,79]. These instances may fuel agency conflicts and adversely affect sustainable performance.
Concerning the control variables used, firm size positively affects financial sustainability. This evidence implies that larger companies may be associated with higher financial sustainability due to the advantages of economies of scale and operational efficiency [10,21]. Surprisingly, leverage and firm age appear insignificant. Board size demonstrates a significant adverse effect, while board independence shows a positive and robust coefficient. These findings support the proposition that corporate boards with smaller memberships and a higher ratio of independent directors may see much greater innovation [65,81], perhaps due to a greater diversity of ideas, advice and perspectives that can shape the decision-making process, resulting in firm value maximisation and sustainable performance.

7. Additional Evidence

An additional analysis using the generalised method of moments (GMM) approach was carried out to assess the robustness of the results in Table 4. This framework uses an instrumental variable estimation approach, employs moment conditions as instruments and provides more reliable estimates [1,93,94]. In particular, this study employed a two-step difference and the GMM system because of their efficiency and consistency in panel data analysis [30,45,78]. This two-step GMM uses the first-step errors to build more consistent standard errors, thereby mitigating heteroscedasticity and serial correlation [78,95]. This additional analysis is reported in Table 5.
Based on the results in Table 5, the lagged dependent variable (FSi,t−1) demonstrates a positive and significant coefficient. The evidence suggests that firms adjust their financial policies gradually to attain optimum financial sustainability. Thus, consistent with the sustainability literature, this finding confirms that there are lags and cumulative effects in attaining optimal sustainable performance [1,10,14]. Further, this additional analysis in models (3) and (4) shows that institutional ownership and family shareholding maintain their positive effects. Likewise, government ownership remains insignificant, while managerial ownership still displays a significant negative coefficient. Generally, the findings using the OLS, fixed effects and GMM techniques appear consistent and strong.

8. Conclusions

This study investigated how ownership structure may influence financial sustainability. We utilised 1020 firm observations of Saudi publicly listed non-financial companies from 2013 to 2022. This study sheds more light on an essential aspect of corporate governance called financial sustainability. The research outcomes reveal a strong positive association between institutional ownership, family shareholding and financial sustainability. However, government ownership has an insignificant impact, while managerial ownership negatively affects financial sustainability. The positive effect implies that a higher proportion of institutional and family shareholdings may enhance long-term value creation, resulting in financial sustainability. In contrast, the negative impact of managerial ownership on financial sustainability suggests that increasing managerial shareholding in Saudi firms may lead to higher agency costs. This instance may erode firm performance and negatively affect sustainable growth.
The research contributes to the literature. This study addresses a fundamental gap in the literature by focusing on the determinants of financial sustainability, which prior studies ignored. Also, this study provides a broader analysis of how different ownership attributes may determine financial sustainability. Hence, the evidence offers new ideas in the corporate governance literature by unveiling a fresh perspective on the determinants of financial sustainability. Further, the research outcomes may have some implications for Saudi Arabia’s Vision 2030. This development plan aims at strengthening corporate governance practices to attract foreign investment and boost the country’s gross domestic product (GDP). The findings imply that firms and policymakers should embrace institutional investment to minimise agency conflicts and promote managerial efficiency. By so doing, firms may signal their internal governance quality and attract domestic and foreign investments for sustainable performance. This achievement may pave the way for Saudi Arabia to actualise its Vision 2030.
Although this study makes substantial contributions to the literature, some limitations must be acknowledged. Firstly, it is necessary to note that this research focuses on non-financial companies. Given that, future studies may emphasise financial firms for comparison. Secondly, future studies may conduct similar research in a different context or geographical setting for additional empirical evidence for confirmation purposes. Finally, future studies may use intervening variables to provide further insights into the relationship between ownership structure and financial sustainability.

Funding

The author assured the financing of the publication.

Institutional Review Board Statement

Not applicable.

Informed Consent Statement

Not applicable.

Data Availability Statement

The study data can be found at the Tadawul website: https://www.saudiexchange.sa/wps/portal/tadawul/home.

Conflicts of Interest

The author declares no conflicts of interest.

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Table 5. Additional regression analysis.
Table 5. Additional regression analysis.
Model 3
(Difference GMM-2 Step-Robust)		Model 4
(System GMM-2 Step-Robust)
VariablesCoef./Std. ErrCoef./Std. Err.
Constant 2.4270 (1.0798) **11.1730 (1.1438) ***
FSi,t−10.0035 (0.0007) ***0.0449 (0.0029) ***
IO1.3229 (0.7547) *2.3949 (0.9215) ***
FO2.3213 (0.6730) ***0.8137 (0.3931) **
GO−3.1646 (2.1721) −0.5736 (0.8474)
MO−8.2537 (2.6909) ***−6.8922 (1.4259) ***
SIZE0.3429 (0.0761) ***0.5225 (0.0601) ***
TD−0.6258 (0.4487)−5.3405 (1.3471)
FAGE0.1970 (0.4210)0.2387 (0.2273)
BS−1.7444 (0.1924) ***−3.2346 (1.2394) ***
BI0.9776 (0.5770) *8.6917 (1.5441) ***
Industry dummiesYesYes
Year dummiesYesYes
AR10.0120.005
AR20.3780.272
Hansen0.2940.187
No of groups120120
***, ** & * demonstrate significance at 1%, 5% and 10%, respectively. Numbers in parenthesis are standard errors robust to heteroscedasticity. Note: FS = financial sustainability, IO = institutional ownership, FO = family ownership, GO = government ownership, MO = managerial ownership, SIZE = firm size, TD = leverage, FAGE = firm age, BS = board size and BI = board independence.
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Alshareef, M.N. Ownership Structure and Financial Sustainability of Saudi Listed Firms. Sustainability 2024, 16, 3773. https://doi.org/10.3390/su16093773

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Alshareef MN. Ownership Structure and Financial Sustainability of Saudi Listed Firms. Sustainability. 2024; 16(9):3773. https://doi.org/10.3390/su16093773

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Alshareef, Mohammed Naif. 2024. "Ownership Structure and Financial Sustainability of Saudi Listed Firms" Sustainability 16, no. 9: 3773. https://doi.org/10.3390/su16093773

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