The Linkage between the Degree of Compliance with Corporate Governance Rules and Profitability: Evidence from Palestine Exchange Listed Firms

Abstract

The underlying objective of this study is to empirically investigate the relationship between the degree of compliance with the rules of the code of Corporate Governance (CG) that became effective in 2009 and profitability of Palestine Exchange Listed firms. Compliance with CG rules is measured based on a criteria of ten corporate governance indicators identified in the study of Abdelkarim and Ijbarah (2010), while profitability is measured by the percentage of change in ROI reported in year 2008 and its average over the period 2009-2015. The Use of ROI as a dependent variable in this study is based on the theoretical assumption that CG should have positive impact on efficiency in terms of cost management and increase in sales due to increase in market share. Prior research in developed economies reported a significant impact of corporate governance on firm performance particularly if measured as a change in market value. However, in Palestine there was only one study that investigated the relationship between corporate governance measured as the level of ownership concentration and firm’s performance measured using Tobin’s Q (Abdelkarim and Alawneh, 2005).

Using regression analysis, this study provides empirical evidence that there is no statistically significant relationship between the degree of compliance with the rules in the code of corporate governance and profitability of sample firms. Explanations for this key finding are provided in this study.