Empirical Evidence on Corporate Governance and Corporate Performance in Tunisia

• Date: 01 November 2007
• Author: Imen Khanchel El Mehdi
• Published date: 01 November 2007
• DOI: http://doi.org/10.1111/j.1467-8683.2007.00655.x

Empirical Evidence on Corporate

Governance and Corporate

Performance in Tunisia

Imen Khanchel El Mehdi*

Recent high-prof‌ile corporate failures in the US and elsewhere in the world, many of which

were caused by, or at least exacerbated by, weak governance practices, have convinced an

increasing number of once sceptical investors that governance is a separate risk class that

certainly requires attention and, in many cases, expert analysis. In this paper we examine

corporate governance in Tunisia, North Africa, by analysing the board, the ownership struc-

tures and the f‌inancial market. By using a panel data set of 24 f‌irms listed on the Tunisian

Stock Exchange for the period 2000 to 2005, we provide evidence that governance in Tunisian

f‌irms is characterised by strong blockholders (often including families). Moreover, f‌irms can

choose between a dual board and a monist board. Our estimates show that Tunisian gover-

nance is weak. Finally we provide evidence for a strong relationship between governance and

corporate performance.

Keywords: Emerging market, Tunisia, economic performance, governance quality

1. Introduction

Previous research studying the link

between law and f‌inance has been concen-

trated on corporate governance around the

world and focused on differences in legal

systems across countries and legal families.

This rapidly developing body of literature

began with the f‌inding that the lawsprotecting

investors differ signif‌icantly across countries,

in part because of differences in legal origins

(La Porta, Lopez-de-Silanes, Shleifer, and

Vishny, 1998). In fact, it has been shown that

better legal protection of investors is associ-

ated with higher valuation of the stock market

(La Porta et al., 2002; Chhaochharia and Grin-

stein, 2007), higher valuation of listed f‌irms

relative to their assets or changes in invest-

ments (Wurgler, 2000), and larger listed f‌irms

in terms of their sales and assets (Kumar,

Rajan, and Zingales, 1999). Furthermore,

industries and f‌irms in better legal regimes

rely more on external f‌inancing to fund their

growth (La Porta et al., 1997; Demirgüç-Kunt

and Maksimovic, 1998; Rajan and Zingales,

1998). Specif‌ically, a greater investor protec-

tion increases the investors’ willingness to

provide f‌inancing and should be ref‌lected in

lower costs and greater availability of external

f‌inancing (La Porta et al., 1998; Durnev and

Kim, 2005). This suggests that we should f‌ind

out that f‌irms with the greatest needs for

f‌inancing in the future will f‌ind it most benef‌i-

cial to adopt better governance mechanisms

today (Klapper and Love, 2004). As a conse-

quence, governments, essentially in emerging

economies, should try to adopt new reforms.

For example Tunisia, a North African

country, recently began its road to improve-

ment by gradually lessening governmental

control. Reforms to increase the pace of priva-

tisation, simplif‌icationof the tax structure, and

a prudent approach to debt have helped real

growth averageto reach 5.8 per cent in the past

few years, and to slow down inf‌lation. Despite

the global economic and f‌inancial turbulence

over the last decade, the Tunisianeconomy has

successfully maintained a high average grow-

th rate. In 2004, the World Economic Forum

ranked Tunisia second for competitiveness on

*Address for correspondence:

Cite Eriadh, Immeuble Narjes

B, appartement 8 Menzeh 7,

Tunisia, 2080. Tel: (216) 71 857

000, Fax: (216) 71 857 555;

E-mail: Im_khanchel@yahoo.fr;

imen.khanchel@isetcom.rnu.tn

EMPIRICAL EVIDENCE ON CORPORATE GOVERNANCE AND CORPORATE PERFORMANCE IN TUNISIA 1429

Volume 15 Number 6 November 2007

© 2007 TheAuthor

Journal compilation © 2007 BlackwellPublishing Ltd, 9600 Garsington Road,

Oxford, OX4 2DQ, UK and 350 Main St,Malden, MA, 02148, USA