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).2002

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... - .

: ()
.

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(2-1)

Yi=+
i

1+exp(jXij)
j=0

Yi

i=1,2,,n

j=0,1,2,,p

: i

: Xij i j Xi01
: j j
i

i
. 2/3 :

exp(i)
2
f( )=
(2-2)

])[1+exp(i

exp(i)
F( )=
(2-3)

)1+exp(i

.-stein)(

)(2-4

E(i)=0

var(i)=i(1i)=vi

) (1i :

exp(i)
1+exp(i)

P(Yi=1|Xi1,Xi2,Xip)=i=

(2-5)

1+exp(i)

:
p

jXij(2-6)
i=
j=0

) (2-6 ) (2-1
:

exp(i)
(2-7)

)1+exp(i
Yi=+
i=i+i

i - i
] [ i i

i ] [

- )( ) (

.
- -

Agustin [8] Odds ) ( Yi = 1

) (Yi=0 :

i
)(2-8

P(Yi=1|Xi1,,Xip)
=

1i

Odds=i=

P(Yi=0|Xi1,,Xip)

)exp(i

exp(i)/[1+exp(i)]
=

1/[1+exp(i)]

) (2-8 i ] [

i=0 i=0 i=1 i :

(2-9)

0i

(2-8) i :
p

LnOdds=lni=ln[exp(i)]=i=
j=0 jXij=logit (2-10)
) ( - i)(
lni . i

) (2-5 ) (2-1

) (2-8 :

odds
)(2-11

1+i 1+odds

exp(i)
=

1+exp(i)

i=

.-stein)(

) (2-10 )(2-11

exp(logit)

exp(lni)

=(2-12)

i=

)1+exp(lni) 1+exp(logit

)(2-7

(2-13)

exp(X)

Y=+=

1+exp(X)

Y1
.

.
.
Yn

Y=

1
.
.
.
n

)(Y=1

- )( ) (

1
.
.
.

0
.
.
.
p

1X11X1p
. .
X= . .

. .
1Xn1Xnp

=[X0X1Xp]

:
)(2-14

E()=0

var()=V=diag(vi)

) (2-1

+ i (2-15)

exp(
jZij)

j=0

jZij)
1+exp(
j=0

Yi=

.-stein)(

(2-16)

)exp(Z

Y=

)1+exp(Z

(2-17)

Z12Z1p

Z11

Z22Z2p

Z21

Z=[1Z*]=

Zn2Znp

Zn1

(2-18)

Zij=(XijXj)/(X
ijXj)

i=1

* Z*Z

* Z . Gunst[8] Z

Eigenvalues&Eigenvectors
ZVZ :
p

(2-19)

-1
g g =G-1G=
ZVZ=GG=
g g
j

j=0

j=0 j j j

- )( ) (

:
=diag(0,1,,p);01p>0(2-20)
ZVZ
:
(2-21)

G=[g0,g1,,gp]

ZVZ :

GG=GG=(GG)-1=I;=GZVZG (2-22)

) (

Yi
:

f(Yi) =i i(1i)1Yi;Yi=0,1 (3-1)

:

n
Y

i
1Yi
L(j) =

)i=1 i (1i

(3-2)

i
-1

=[exp(
jXij)] [1+exp( jXij)]
i=1

.-stein)(

:
L(j)=
p

X )]Yiln[1+exp(

lnL( j)={ln[exp(
j ij
jXij)]}
j=0

i=1

j=0

(3-3)

:
n

L(jML)
1
=
X
{
Y
.
P
i
j ij
j=0
j
jML I=1
j

1+exp(
X
)
j
ij
j=0
P

[1+exp(
j=0
jXij)]}

[YiXijiMLXij]=0

)(3-4

i=1

) (3-4 :

2L(jML)

2
=[Y
iXijiMLXij]=
i=1
jML
jML

(3-5)

[XijiML(1iML)Xij]

- )( ) (

) (3-4
S() :
S() =[L()/0,L()/1,,L()/p]
^

=X(Y)=0

(3-6)

) (3-5
:
=X.var().X

S()/

=XVX=Xdiag(Vi)X

(3-7)

) (3-6 ScoringEquation

] Czepiel [6 p + 1
p

p + 1

Iterative
Approach . NumericalMethods

) ( Stein
Stein OLS

(4-1)

^
^
St=StLS


.-stein)(

LS

St Shrinkage

Factor 0<St<1 :
^^
^
^^

)St=LSLS/[LSLS+tr(varLS)](4-2

] Schaefer[15 Stein
ML :
^

StL=StL ML;0<StL<1

(4-3)

]Schaefer [15

StL1

Stein ) (4-3 :

^
^
=E[(StL-)(StL-)]

^ StL)
MSE(

^
^ ML-)]
^
=tr[var(StL ML)+[E(StLML-)][E(StL
:
^ )]E(
^ )
+2StL[E(
ML
ML
-StL[E(
^ ML)]-
^
-StL[E(ML)]+
+

=2StLtr(ZVZ)

^ )
MSE(
StL

- )( ) (

ML Asymptotic
Unbiased
^
E(ML)= :
=2StLtr(ZVZ)+2StL-2StL+

^ )
MSE(
StL

=2StLtr(ZVZ)+(StL-1)2
(4-4)

StL1 (4-

) 4 Stein ) (4-3 :

MSE(StL)

=2StLtr(ZVZ)+2(StL1)=0 (4-5)
StL
) (4-5
^
^
^
^
^^
StL1 =MLML/[MLML+tr(ZVZ)]

(4-6)

] Marx&Smith[12

StL2 ) (2-21) (2-20

)(2-19
ZVZ ) (4-4 Stein
) (4-3 :
^ -)]
^ StL-)ZVZ(
=E[(
StL
^ ML-)GGStL(^ML-)]
=E[(StL(

^ )
MSE(
StL

.-stein)(

=G
^
^
=E[(StL(ML-)(StLML-)]

^
MSE(StL)

p
^
2

=E[(
(
StL
j-) j]

p j=0

2
=E[(
StLj-) j]
j=0

2
^
^
=var(
StLj)+{[E(StLj-)] } j

j=0

^ 2jj

=P StL+(StL-1) g

j=0
(4-7)
2

StL2
)(4-7 Stein ) (4-3 :
^

MSE(StL)
p
^ 2jj=0

=2PStL2+2(StL21)g
StL
j=0

(4-8)

) (4-8
p

(4-9)

^
^
^ ^ 2
^ 2
StL2 =g
/[P+g
j j]
j=0 j j
j=0

StL3

. StL2 StL1
Stein ) (4-3

) (3-3
) (3-7 ) (3-6

- )( ) (

. Christian[4]
) (3-6 I

(4-10)

2
] ^ +[

L() -1 L()
=

^
(I)(I)
(I)

) (4-10 ) (
. :

^ =
] ^ +[
2L() -1 L()

(4-11)
h
h-1
^
^
^
(
h-1)(h-1) (h-1)
h .
:
^
^ =
^ +(XV
-1
^

h
h-1
h-1X) X(Yh-1) (4-12)

.-stein)(

:
(4-13)

^ =
^
lim
h
StL

) (3-7
Cox&Snell[5] :

S()
I() =E[-]=E{-[-X.var().X]}

=XVX

)(4-14

) (4-14

Stein

(4-15)

^ )=[I()]-1=(XVX)-1
var(
StL

) (4-6 ) (4-9
n Stein

^
^
^
E(StL)=E(StLML)=StLE(ML)=StL

^
^
E[StL-StL]=E[StLML-StL]

)=StLE(ML-) 0 (4-16

- )( ) (

^
^
^
var( StL)=var(StLML)=2StLvar(ML)

=2StL(XVX)-1

)(4-17

) ( Stein
Stein

:
:

:
) (2-5 ) (2-6 Stein )(4-3
ist Stein :

1
(5-1)

jStXij)

ist

1+exp(-
j=0

Stein.

Xj )(5-1
:
p
jstXij)]
-(-jst)[exp(-
j=0
p

jstXij)]2
[1+exp(-

ist

X
j

j=0

jstXij)
exp(-
1
j=0
=jst[][]
p
p

1+exp(-

) jstXij
)jstXij
1+exp(-
j=0

j=0


.-stein)(

(5-2)

=jstist(1-ist)

ist

Kaufman
] [9:

ist

)(5-3
jstist(1-ist)
ni=1

ist :
0.99

0.95

0.1 0.2 0.5 0.8 0.9

0.05

0.01

ist

ist
0.0099 0.0475 0.09 0.16 0.25 0.16 0.09 0.0475 0.0099
Xj
jst jst jst jst jst jst jst
jst
jst
ist=0.5 . jst/4

ist=0.8 ist=0.2

.
:
) - (2-8 (Yi

) =1 )- (Yi=0 Stein (4-

) 3 ist Stein p :

j=0
=exp(ist)=exp(

)(5-4
jstXij)

ist

- )( ) (

jst
Xj
:

=exp(0+1X1++jXj++ pXp)

ist(Xj)

=exp(0+1X1++j(Xj+1)++pXp)

ist(Xj+1)

:
=exp(jst)

)(5-5

ist(Xj+1)

ist(X
j)

Xj exp
). (jst

jst=0 exp( jst)=1

jst>0 exp(jst)>1 .
jst<0 exp(jst)<1 .
:

ist(Xj+1)ist(Xj)

]100=[exp(jst)1]100

(X
)

ist
j
(5-6)

.-stein)(

:
Stein ) (4-3 ): (2-10
logit=lnodds=lnist=ln[exp(ist)]

=
jstXij

)(5-7
j=0

jst

Xj lnist
Xj :

ist(Xj+1)
lnist(Xj+1)lnist(Xj)= jst=ln[]
)(5-8

ist(Xj)
Xj
. jst

) (
Schaeferet.al[14],Schaefer
[15] Lee & Silvapulle [11] , Marx & Smith [12] , Kemeny [10]

:
.

- )( ) (

Stein

:
-

:
p=2 :
p=5 :

X )
(
Oliver[13] SAS

) (

:
90%,99%

2
R j =0%,

- ) Xi(p-1
:
p=2

Xi2=Xi1+.D(0,1)

(6-1)

=0.3333&0.1005

p=5

Xi5=Xi3+Xi4+.D(0,1)

(6-2)

=0.45&0.142

.-stein)(

) D(0,1
) (
]Schaefer[14],[15

=0.9487&0.9950

(6-3)

0
0

0
0
0
1

0
0
1
0

0
1
0
0
0

1
0
0
0
0

=0.8738&0.9036

(6-4)

n=17 :

n=43 :

n=180 :

- X
) ( Rj2,p,n . Z

- )( ) (

= 0

ZZ

s=small

= 90

ZZ

l=large

- Z :
) exp(Z
=

(6-5)
) 1+exp(Z

- h=450 Y Z

^
ML
). V^ (2-14
Stein
^
StL1 ^ StL2 ^stL3 StL1
StL2 StL3 .
MSE
Stein

.-stein)(

n h=450
MSE :
^

2

)[(
]j,ij

i=0 j=0
^ =
)MSE(
(6-6)
n

)(6-1

Stein

MSE

ML

>

stl1

>

stl2

>

>
stl3

p=2

) (6-1
MSE
p=5

L
0.182
0.381
1.172
0.210
0.493
1.123
0.194
0.491
1.090
0.202

S
0.214
1.771
8.522
0.241
0.594
0.762
0.232
0.483
0.711
0.236

L
0.292
0.864
1.471
0.320
0.773
1.034
0.304
0.760
0.974
0.311

S
0.314
7.531
11.464
0.370
0.784
0.873
0.342
0.610
0.861
0.355

S
0.076
1.161
1.560
0.087
0.560
0.833
0.075
0.524
0.810
0.081

n=17

L
0.090
0.291
0.870
0.043
0.320
0.890
0.080
0.343
0.871
0.058

n=43

S
0.410
9.810
14.843
0.511
0.832
1.583
0.481
0.810
1.260
0.495

n=180

L
0.421
1.163
1.822
0.491
0.981
1.364
0.491
0.964
1.343
0.491

n=17
S

0.720
5.733
11.761

0.473
0.714
0.872
0.464
0.682
0.844
0.468

n=43
L
0.341
0.482
1.061
0.391
0.613
1.290
0.314
0.580
1.271
0.350

n=180
S
0.144
0.824
1.221
0.144
0.210
0.263
0.114
0.181
0.241
0.128
0.195
0.252

0.596
1.281

0.697
0.857

0.972
1.353

0.821
1.412

0.331
0.880

0.541
0.821

0.492
1.106

0.535
0.736

0.766
1.003

0.691
0.866

L
0.045
0.121
0.352
0.048
0.211
0.711
0.045
0.194
0.671
0.046
0.202
0.691

- )( ) (

.-stein)(

) (6-1 :
: =0 :
ZZ
:
. Stein

. MSE
Stein . MSE

.
.

n = 17
n=180

. Stein
^
Stein

^
stL2

^
stL1 . . ^stL3 Stein ^stL3
stL1 .

. Stein
.


- )( ) (

: =90 : ZZ
:

.

Stein .

n=43,p=5,p=2 n=180 ^ML

.

. Stein

Stein stL2
^
^
^
Stein . stL3 stL1 stL3
^stL1 .

Stein

Stein

Stein
.

()stein- .

References

[1] Agustin, A. R.(2002), "Logistic Regression and World

IncomeDistribution",IAER,7(2):231-242.
[2] Ana, M. A., Manuel, E., and Mariano, J. V. (2006), "Using
Principal Components for Estimating Logistic
Regression
with
High-Dimensional
Multicollinear Data", Computational Statistics
andDataAnalysis,50,1905-1924.
[3] Berkson, J. (1951), "Why I Prefer Logit to Probit",
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[4] Christian, G. (2000), "Econometrics of Qualitative
DependentVariables",Crest-Insee,Paris.
[5] Cox, D. R. and Snell, E. J. (1989), "The Analysis of Binary
Data",London:ChapmanandHall.
[6] Czepiel, S. A. (2002), "Maximum Likelihood of Logistic
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Ca/jfox/
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Logistic Regression : A
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Standardized Coefficients", Social Science
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Logistic Regression", Communication in
Statistics: Simulation and Computation, 17, 4,
1231-1257.
[12] Marx, B. D., and Smith, E. P. (1990). "Weighted
Multicollinearity in Logistic Regression:
Diagnostics and Biased EstimationTechniques
with an Example from Lake Acidification",
Candian Journal of Fisheries and Aquatic
Science,47,1128-1135.
[13]Oliver,K.(2001)."How to Use SAS for Logistic Regression
with Correlated Data", Institute of Medical
Epidemiology, Biostatistics, and Informatics,
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()stein- .

Journal of Statistical
Simulation,25,75-91.

Computation

and

[16]Stein,C.M.(1960)."Multiple Regression In Contributions

to probability and Statistics", Essays in Honor
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StanfordUniv.Press.


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JRLoftheFacultyofCommerceforScientificResearch.Alex.Unv.Vol.47No.1JAN.2010

AComparativeStudyofStandardCostingPractices:
UAE,MalaysiaandUK

Dr.AttieaMarie
AssociateProfessor&ChairofDepartmentofAccounting
CollegeofBusinessAdministration
UniversityofDubai

Abstract

Purpose: This paper compares standard costing practices among

UAE,MalaysiaandUK.
Design/Methodology Approach: A cross-sectional survey of a
sample of accounting and finance mangers of industrial and
servicecompaniesinUAEwasused.IusedMannWhitneyU-test
toidentifysignificanceofresultsandnon-responsebias.
Findings:NewcostingtechniquessuchasABC,JIT,targetcosting
(TC),qualitycostreporting(QCR),balancescorecard(BSC)and
TQC have not led to the obsolescence or the demise of standard
costing in UAE. Simplicity, affordability, and flexibility standard
mayexplainsuchpersistence.
Originality/value & Practical Implications: Management
accountingandfinancepracticesinUAEisastepbehindMalaysia
and UK. The focus in UAE remains primarily on a mix of cost
determination,andmanagementplanningandcontrol.
Keywords:StandardCosting,VarianceAnalysis,UAE,Industrial
andServicecompanies.
JEL classification:G30,G32,M40,M41

Dr.AttieaMarie-AComparativeStudyofStandardCostingPractices:.

1. Background
Standard costing was presented as a substantive scientific
innovation in the accounting field with two different views. One
claims that standard costing is obsolete and the other ascertains
thatstandardcostingisstillthedominanttooldespitetheadvent
andthewideuseofnewmethodsaroundtheglobesuchasTarget
Costing (TC), Activity Based Costing (ABC), Just in Time (JIT),
Balanced Scorecard (BSC), and Quality Cost Report (QCR)
(Joshi, 2001; Garg et al., 2003; Zoysa &Herath, 2007; Sungkyoo
et al.,2008; Connolly et al,2009). A number of researchers had
predictedthedemiseofstandardcostingandvarianceanalysison
the ground that these tools had become irrelevant for companys
performance management (Kaplan and Johnson, 1987; Johnson,
1992; Lyall & Graham, 1993; and Hilton, 2002). In their views,
this method is disconnected from actual practices at the industry
level. For others, the loss of touch with reality stems from the
intense competitive environment that requires a higher level of
sophistication in costing systems (Al-Omiri and Drury, 2007;
Anjaneyulu,2009).

For example, Fleischman and Tyson (1998) claimed that

standard costing cannot provide assistance for construction
strategyandoperationalmanagement.HansenandMowen(2002),
caution against the use of standard cost accounting due to its
potential dysfunctional operational behaviors. These criticisms
have largely contributed to the dismissal of standard costing
especially for large size companies which employ more
sophisticated methods such as ABC (Malmi, 1999; Al-Omiri and
Drury, 2007; Brimson, 2007) and target costing (Kato, 1993;
Cokins,2002; Yook, 2003). Lucas (1997) raised questions as to
whether it is still appropriate to continue teaching this topic in
accounting curriculum, and argued that standard costing is
outdated.
Whileseveralacademicswerepointingouttheweaknesses
ofstandardcosting,othershadobservedthatinpracticesuchan
accounting tool is widely used (Pierce and ODea, 1998;


JRLoftheFacultyofCommerceforScientificResearch.Alex.Unv.Vol.47No.1JAN.2010

WijewardenaandZoysa,1999;Connollyetal.,20091).Thiswould
be the case of all countries (Joshi, 2001; Sulaiman et al., 2004).
Studiesconductedindevelopedcountrieshaveshownanextensive
use of traditional costing tools in general2 and a high level of
disseminationofstandardcostinginparticular,65%adoptionrate
inJapan(Young1992).Druryetal.(1993)reportedthatmorethan
73%ofcompaniesintheUKusestandardcosting.
LyallandGraham(1993)statedthatmorethan90%ofthe
231companiessurveyedintheUKapplystandardcostingforcost
control purposes. Furthermore, they found that 63% of the
managers using this technique express their satisfaction in terms
ofitssupporttodecisionmaking.Inanotherstudy,Guildingetal.
(1998) highlighted that 76% of 303 accountants in the UK and
73%of85offinanceandaccountinginNewZealandusestandard
costing. In addition, according to Guilding et al. (1998),
accountantsseemoderncostingandproductionmanagementtools
as havingnoimpact ontheextentof useofstandardcosting and
variance analysis. These respondents even predict an increase in
its importance. In a study by Sulaiman et al., (2005) 70% of 66
localfirmsand 76%of21Japanesefirmsoperating in Malaysia,
evidencedlargedisseminationandpersistenceofstandardcosting.
These studies reveal that standard costing does not overemphasize cost control and, moreover, it is linked to quality
management.Inaddition,Lucas(1997)andSulaimanetal.(2005)
show that companies use past performance instead of predetermined engineering standard on actual costs. Instead of
employing costly systems, companies have chosen to reconfigure
existing systems with more rigorous schemes implying that firms

TheirargumentofstandardcostingimportanceisthatAsorganizationsseekways
toimproveperformance,reducecosts,andmaximizethevaluecreatedforcustomers
andotherstakeholders,theyneedtomakesurethatthedynamicsembeddedintheir
managementcontrolsystemthelinkagesbetweengoalsettingandperformance
create a natural platform for internalization of the organization's goals by the
workforce
2
Gargetal.(2003)foundthatina1995surveyofIMA,traditionalcostingtools
suchasstandardcostingareusedbymorethan76%ofIMAmembers.

Dr.AttieaMarie-AComparativeStudyofStandardCostingPractices:.

haveadaptedstandardcostingtotheirspecificneedsandhavenot
abandonedit(Gargetal.2003;Sulaimanetal.,2005).
In the light of theforegoing inconsistency in the academic
researchontheuseofstandardcosting,thispaperdocumentsthe
existing practice of usage of standard costing and variance
analysisinUAEasacasestudy.Thisstudyisimportantduetothe
fact that UAE is a fast growing economy. Further, a number of
events make the study appealing such as UAE government has
freedpricesandwages,rationalizedtheindirecttaxes,deregulated
the financial system, and made new information and
communication technology the focus of development by all
companies.
ThisstudyisalsodifferentfromearlierstudybySulaiman
etal.WhileSulaimanetal.(2005)splittheirsampleonthebasisof
ownership: Japanese vs. Local, this study disaggregates the
companiesbasedonsectors:Industrialvs.Service.Thisapproach
is motivated by two reasons. The first is contextual, i.e., by law
foreignersinUAEcannotown50percentormoreofacompany,
unlessthatcompanyislocatedinthefreezones.Thus,itisjustnot
possibletodifferentiatebetweennon-localandlocalcompaniesin
UAE.Moreover,bystudyingtheservicesectorseparately,wecan
capturetheimportanceofthissectorintermsofitscontributionto
UAE GDP. The second relates to the fact that the service sector
has received less academic research attention than the industrial
sector when it comes to the use of standard costing. A plausible
reasonforscantyresearchmightbetheperceptionthatstandard
costingisnotappropriatetotheservicesectorandtheclaimthat
service companies literally distance themselves from such
accountingpractice.
This paper therefore, specifically addresses the following
researchquestions:
1. WhetherstandardcostingisusedornotinUAE?
2. How important are various functions in standard
costing?
3. Howfrequentlyvarioustechniquesareusedinstandard
costing?


JRLoftheFacultyofCommerceforScientificResearch.Alex.Unv.Vol.47No.1JAN.2010

4. How important is the analysis of variance for control

purposes?

2.Methodology

2.1.Sampleselection
Thedatausedinthispaperwasgatheredthroughasurveyquestionnaire.Thecompanieswerechosenrandomlycoveringall
sub-components of Industrial Services & Trading Sector in UAE
with37%responserate3.

2.2.Questionnairedesign
The questionnaires of Drury et al. (1993), Guilding et al.
(1998) and Sulaiman et al. (2005) were modified to facilitate
comparison of our study findings to the studies in UK and
Malaysian companies. The questionnaire consisted of
demographics, characteristics of cost accounting tools and
standardcostingpracticesinUAE.

3.Resultsanddiscussion
3.1Demographics
The analysis of industrial sector respondents in UAE
(Table1)revealsthat25%ofrespondentswereengagedinOil&
Gas activities. Construction activities constituted 19%. Textile
activities constituted 13%. Chemicals & Plastics and Food
activities constituted 10% each. Engineering and Electronics
activitiesconstituted8%each.Paper&Packagingconstitutedthe
leastat6%.

The survey was conducted from May 2007 to February 2008 and questionnaires
were emailed to 480 companies listed in Dubai and Abu Dhabi Chamber of
Commerce & Industry 2006-2007 Directory. Series of follow-ups resulted in a
responserateof40%industrialsector&33%servicessectorrespectively.

Dr.AttieaMarie-AComparativeStudyofStandardCostingPractices:.

Table1.UAECompanycharacteristics(sub-sectortype)
ActivitiesofUAErespondents
Percentage
A.IndustrialSector(105companies)
1.Chemicals&Plastics
2.EngineeringIndustries
3.Textiles
4.Food
5.Construction
6.Paper&Packing
7.Electronics
8.Oil&Gas

B.Service&TradingSector(78companies)
1Financial*
2Non-financial**

10
8
13
10
19
6
8
25
100

60
40
100

*Banking,Insurance,financing
**RealEstate,Hotels,Trading,Consultancy,
Education,Hospitality

At the same time, under Service & Trading Sector, 60%

respondents were from financial companies while 40%
respondentswerefromnon-financialcompanies.
The asset base of the industrial companies was slightly higher
comparedtoservicecompanies(Table2).

Table2.UAECompaniescharacteristics(totalassets)
TotalAssets
IndustrialSector
ServiceSector
10-100million
101-500million
Above500
million
Missing
Total

Frequency
29
42
27

Percentage
30
43
27

Frequency
19
34
14

Percentage
28
51
21

7
105

-
100

6
73

-
100

The data clustered between 10-500 millions of dirham (MDhs)

withacumulativefrequencyof73%inIndustrialSectorand79%
in Service sector indicating that most of the sample respondents


JRLoftheFacultyofCommerceforScientificResearch.Alex.Unv.Vol.47No.1JAN.2010

weresmall-tomedium-sizecompanies(SMEs)4.
Intermsofnumberofemployees,Table3revealsthatthe
majority of surveyed companies (84% in Industrial Sector
companies and 56% in Service Sector companies) had less than
500 employees. Only 16% of industrial companies and 44% of
service companies had more than 500 employees. This findings
indicates that themajorityofUAEcompaniestendtopay more
attentiononhightechnologyinvestment.
Table3.UAECompaniescharacteristics(numberofemployees)
Numberof
Employees
Below100
100-500
Above500
Missing
Total

IndustrialSector
Frequency
Percentage
35
35
49
49
16
16
5
-
105
100

ServiceSector
Frequency
Percentage
12
17
28
39
31
44
2
-
73
100

3.2Adoptionofstandardcosting
Table4reportstheuseofstandardcostinginUAEasan
accountingtooltoachievedifferentobjectives.

Table4.AdoptionofStandardcosting

UAE
Malaysia
UK

Industrial Service Japanese Local

%
%
%
%
%
Yes
No
Total

72
28
100

51
49
100

76
24
100

70
30
100

76
24
100

The results of the earlier studies, Suleiman et al. (2005);

Guilding et al. (1998) and Drury et al. (1993), are reported for
comparison purpose. As can be seen from Table 4, the adoption
rate of standard costing in UAE 72% for industrial companies
(comparedto51%forservicecompanies).Incomparison,76%of
Japanese companies in Malaysia and 70% of Malaysian Local
companies adopted standard costing, while 76% in UK adopted

Acriteriaof500MDhsisconsideredfortreatingsuchcompaniesasSMEs

Dr.AttieaMarie-AComparativeStudyofStandardCostingPractices:.

standard costing. These results for both industrial and service

sectorcompaniesinUAEareconsistentacrosscountries,implying
thatstandardcostinghasnotbecomeobsoleteineitherIndustrial
orServiceCompaniesinUAE.

3.3Usesofstandardcosting
Table 5 shows the uses of standard costing in UAE
companies using a Likert Scale 1-7, with responses of 4
evidencingimportanceandthose<4evidencinglessimportance.

Table5.Usesofstandardcosting

UAE
Malaysia
UK

Industrial Service Japanese Local

Function
%
%
%
%
%
1.Costcontroland
86*
73
83
82*
performanceevaluation
2.Costinginventories
88*
59*
89*
68
3.Computingproduct
87*
61
83
78
costfordecision
making
4.Asanaidtobudgeting
77
81*
88
67
5.Dataprocessing
53
54
75
56
economies
MWUteststatistic5:*significantat5%**significantat10%

72
80*
62
69
43

The cost functions viz., cost control and performance

evaluation, costing inventories, and computing product cost for
decision making, were relatively of greater importance in UAE
industrial sector companies than in Malaysia and UK. These

Oneoftheissuesrelatedtothecollectionofprimarydataisthelikelihood
that the survey questionnaires that were received late might indicate non- or
unreliable responses due to the fact that managers might fill the questionnaire just
for the sake of it due to their pre-occupation. In other words, these late responses
maynotreflectwhatisactuallyhappeningatthefirm,letalonethecurrentpractice.
We test for the existence of a non-response bias using the Mann-Whitney U-test
(MWU), by selecting first and the last 10 responses. We computed the mean
responsescoresforeachquestiontotestwhetherthedifferencesinthemeanswere
statistically significant across the two sub-samples. Our analysis rejected the nullhypothesistoconcludethatourdatadonotsufferfromthenon-responsebias.


JRLoftheFacultyofCommerceforScientificResearch.Alex.Unv.Vol.47No.1JAN.2010

standardcostingfunctionswererelativelyoflowerimportancein
service sector than in industrial sector companies. In terms of
significance, inventory costing is the common dominator of
standard costing in UAE, Malaysia and UK, while for industrial
sector in UAE cost control and performance evaluation and
computing product cost for decision making are significant
functionsofstandardcostingtoo.Forservicesector,budgetingis
the significant function of standard costing. MWU results reject
thenullhypothesisofresponsebiassuggestingthattheindustrial
sectorcompaniesinUAEusestandardcostingtoagreaterextent
thantheservicesectorforthefirstandthirdfunctionsofstandard
costing,( namely, cost control and performance evaluation, and
computingproductcostfordecisionmaking).Onlyinoneinstance
has this pattern reverted towards the service sector: the use of
standardcostingasanaidtobudgeting.Thesefindingsonaverage
areconsistentwithotherstudiesinMalaysia,andUK.

3.4.Laborandmaterialstandardssetting
Themechanismsofsettinglaborandmaterialstandardsare
reportedinTables6.90%oftheindustrialsectorrespondentsand
63%oftheservicesectorinUAEemployedstandardsbasedon
design/engineeringstudies,whichiscomparabletoJapanese
companiesinMalaysia(81%),andUK-basedcompanies(51%).
Thus,thesecompaniesappeartobemorescientificintheir
approachtostandardsettingcomparedtothelocalcompaniesin
Malaysia.
Table6.LaborandMaterialStandardsSetting

Method
1.Standardsbasedon
design/engineering
studies
2.Observationsbased
ontrialruns
3.Workstudy

UAE
Malaysia
UK
Industrial Service Japanese Local
%
%
%
%
%
90**

63*

68

51

45

65

81*

46

51*

53

42

30

25

26

42

Dr.AttieaMarie-AComparativeStudyofStandardCostingPractices:.

techniques
4.Averageofhistoric
68
76*
44
63*
usage
MWUteststatistic:*significantat5%**significantat10%

44

MWU-test confirms that the key method to set labor and

material standards is based on design/engineering studies in
majority of UAE, UK companies and Malaysian Japanese
companies.Ontheotherhand,servicessectorcompaniesinUAE
and Malaysian Local companies predominantly used average of
historic usage method more than all other companies in UAE,
MalaysiaandUK.

3.5.Typeofstandards
Table 7 shows that all companies in UAE, Malaysia, and
UK mainly use average past performance standards to set
materials and labor standards. All other types of standards are
usedbuttoalesserextentforthethreecountries.

Table7.TypeofStandardsEmployed

UAE
Malaysia
UK

Industrial Service Japanese Local

Type
%
%
%
%
%
1.Maximumefficiency
standards
2.Achievablebutdifficult
toattainstandards
3.Averagepast
performancestandards
4.Others
Total

26

21

23

19

43

44

8
100

16
100

33

17

22

31

44

39

37

46

6
100

15
100

5
100

3.6.Reviewofcostingstandards
UAE companies have become more internationalized in
their operations,and hencearefacinggreatercompetitioninthe
globalmarkets.ThusonewouldexpectUAEcompaniestoreview
their costing standards frequently to cope with the changing
environmentwherenewproductsareintroducedonadailybasis.
Table 8 shows that 46% of industrial companies in UAE
reviewed costing standards semi-annually compared to 55%
response by Japanese respondents and 18% in local Malaysian


JRLoftheFacultyofCommerceforScientificResearch.Alex.Unv.Vol.47No.1JAN.2010

respondentsinMalaysiaand9%ofrespondentsinUK.Ascanbe
seen from table 8 reviews of costing standards were
predominantlyannualinUK (68%).Thismaybeduetothefact
that the UK study was conducted in the beginning of the 90s,
whentheusageofinformationtechnologywasverylimited.

Table8.ReviewofCostingStandards

UAE
Malaysia
UK

Industrial Service Japanese Local

Frequency
%
%
%
%
%
1.Monthlyorquarterly
2.Semi-annually
3.Annually
4.Continuously
5.Whenthevariances
implythatthe
standardshave
changed
Total

22
46
23
8

24
38
31
2

17
55
11
17

24
18
35
15

14
9
68
6

100

100

100

100

100

On the other hand, 38% of Service companies in UAE

reviewed costing standards semi-annually while 31% of
respondentsreviewedtheircostingstandardsmorefrequentlyi.e.,
continuously.
Results from table 5-8 when considered together signify
that companies in UAE have not abandoned standard costing in
theirmanagementcontroldecisions,andinfacthavereconfigured
existing cost accounting systems to suit their dynamic needs and
objectives.TheseareconsistentwithstudiesinMalaysiaandUK.

3.7Varianceinvestigation
In general, good practice of standard costing requires all
variations that are out of range of acceptable variances
necessitatingfurtherinvestigation.Table9showstheresponsesof
thecompaniesontheapproachestakentoinvestigatesuchoutof
rangevariances.

Dr.AttieaMarie-AComparativeStudyofStandardCostingPractices:.

Table(9):VarianceInvestigation

UAE
Malaysia
UK

Industrial Service Japanese Local

Approach
%
%
%
%
%
1. Decisionsbasedon
managerialjudgment
2. Whenthevariance
exceedsaspecific
monetaryamount
3. Whenthevariance
exceedsagiven
percentageof
standard
4. Usingcontrolcharts
orotherstatistical
models
Total

28

40

17

17

28

28

27

15

100

100

26

22

48

28

33

26

32

33

23

14
100

12
100

2
100

28% respondents in industrial sector companies and 40%

respondents in service sector companies in UAE did their
investigating decisions based on managerial judgment
compared with 48% for UK companies, 26% for Japanese and
22%forlocalcompaniesinMalaysia.Onotherhand,28%ineach
of the industrial sector and the service sector did their
investigating decisions when the variance exceeded a given
percentage of standards, which is approximately similar to those
in Malaysian and UK studies. All other investigation decisions
approachesarealsobeenusedinapproximatelyclosedportionsin
thethreecountries.

3.8Importanceofvariancesforcontrolpurposes
Table10.Theimportanceofvariancesforcontrolpurposes

UAE
Malaysia
UK

Industrial Service Japanese Local

Variance
%
%
%
%
%
1.Materialprice
2.Materialusage
3.Materialmix
4.Materialyield
5.Wagerate

88*
65
71
81
59

79*
51
47
51
75*

94
82
46
60
82

92
93
52
55
70

69
66
35
52
36


JRLoftheFacultyofCommerceforScientificResearch.Alex.Unv.Vol.47No.1JAN.2010

6.Laborefficiency
62
76*
88
69
7.Variableoverhead
52
71
efficiency
65
59
8.Overhead
39
73
expenditure
84*
69
9.Fixedoverhead
44
54
volume
43
50
10.Fixedoverhead
40
52
volumeefficiency
67
39
11.Fixedoverhead
49
69
volumecapacity
54
54
12.Salesvolume
88*
83*
100
90
13.Salesprice
82
73**
92
91
MWUteststatistic:*significantat5%**significantat10%

65
32
69
28
18
18
70
69

Asshownintable 10,UAEindustrialcompaniesare most

sensitive to variances in material prices, sales volume, overhead
expenditure and sales prices. This pattern is also observed for
UAE service companies, Malaysia, and UK for the first two
variances. The least important variances, as observed from table
10,takedifferentpatternbetweenthethreecountries.
MWU test reveals that only four significant differences
emerge between the two sectors. Variances in overhead
expenditure is monitored to a greater extent in the industrial
sectorthantheservicesectorwhilevariancesforwagerate,labor
efficiency,andforsalespriceareofmostconcernsrelativelyfor
the service sector when it comes to management control. These
findings show the relevance of our choice to distinguish between
industrialandservicecompanies.

4.Conclusions
This paper investigated the extent of standard costing practices
amongUAE,MalaysiaandUK.Thestudyenablesusnotonlyto
add to the existing costing literature in general and UAE in
particular,butalsotocompareourfindingswiththoseofprevious
studiesinMalaysiaandUK.Thekeyfindingsofthestudyareas
hereunder:
The study tested for robustness of our results using the
Mann-Whitney test wherever differences have emerged in the
empirical work. We are then able to report that our findings do

Dr.AttieaMarie-AComparativeStudyofStandardCostingPractices:.

notsufferfromnon-responsebias.
-72%ofindustrialsectorand51%ofservicesectorcompaniesin
UAE use standard costing compared to Malaysian Japanese and
UKcompanies76%eachand70%ofMalaysianlocalcompanies.
-As practices in Malaysia and UK inventory costing is the most
importantfunctionofstandardcostingforindustrialsectorwhile
aid to budgeting is the most prevalent costing function for
servicesector.
-The majority of industrial sector companies in UAE, Malaysian
and UK companies use standards based on design/engineering
studies while the majority of service sector and Malaysian local
companiesemployaveragehistoricusage.
-Theaveragepastperformancestandardsisacommondominator
inpracticeinUAE,MalaysiaandUKcompanies.
-ThemajorityofUAEcompaniesandJapanese
-Malaysian companies review their cost standards on semi-
annually base. While UK companies and Local Malaysian
companiesreviewtheircoststandardsonannually,base.
-There is no agreement among the three countries on the
investigation approach that should be followed if the specific
variancewasunacceptable.
-In regard to the importance of variances for control purposes,
the study reveals that material price and sales volume are the
most important for all companies in the three countries. In
additiontothat,thestudyfoundsomeothertypesofvariancesare
alsoimportantatdifferentweightsfromcountrytoanther.
- Even thought the majority of chief cost accountants in UAE
earned diplomas from developed countries, it seems that
management accounting practice in UAE did not reach stage 3
(reduction of waste in resources) and 4 (creation of companys
value)oftheIFACframework,(IFAC,1998).AsinMalaysiaand
UK(Sulaimanetal.2005),thefocusinUAEremainsprimarilyon
a mix of cost determination (stage 1), and management planning
andcontrol(stage2).
The empirical findings appear to suggest, despite the various
criticisms leveled at standard costing, it is still being used by a
large majority of companies in UAE, Malaysia and UK. There
would be many explanations for such persistence, simplicity,


JRLoftheFacultyofCommerceforScientificResearch.Alex.Unv.Vol.47No.1JAN.2010

affordability, and flexibility may be one (Cheatham and

Cheatham 1996; Sulaiman et al., 2005; Jui-Chi Wang, 2006).
Another plausible rationalization is that companies use two or
morecostaccountingmethodstobuildmorepowerfulintegrated
systems which allow reporting cost information according to
variouscriteriaandfordifferentcategories(Szychta,2002,CheeChengChen,2008).Otherpossiblereasonforthismaywellbedue
to the fact that such companies have modified their standard
costing systems to be in line with the current manufacturing
environment(Lyalletal.1990,Jui-ChiWang,2006).Accordingto
Lucas (1997), real time feedback is now possible due to the
integrated computerized manufacturing and accounting systems.
Hence,theargumentthatcontrolreportspreparedlongafterthe
operations have been completed may not hold true6. Japanese
companysplanandcontroltheircostsbyusingstandardcosting
to specifying in advance what should be achieved and then
measuring the extent to which it is being achieved. To suit the
current manufacturing environment, the only modification they
have made is, instead of basing their standard costs on a predetermined engineering standard, they use theactualproduction
cost of the last period, applying a target reduction rate to this.
Such a method enables them to continuously improve on their
product cost (Lucas, 1997).Moreover, Anjaneyulu, Logan (2009)
hasextendedthesameideaofstandardcostingtoformulatesome
serious performance metric systems to monitor and control the
way money is planned, spent, tracked and reported. One of the
significant components of such an internal control metric system
is forecast what the company wants to spend, and account for
whatthecompanyhasspent.
However, care must be exercised in generalizing our
findings. Although the survey was sent to companies of all sizes,
measuredintermsoftotalassetsorthenumberofemployees,the
majorityofresponsesreceivedwerefromsmall-andmedium-size

Thebestexampleofhowstandardcostinghasbeenmodifiedtosuitthe
current manufacturing environment is the use of the technique in kaizen costing
whichfocusesoncontinuousreductionsofcoststhatshouldberealizedforexisting
products in a company and also requires comprehensive and efficient tools for
measuringperformanceforplanningandcontrolpurposes(Garvin,1993).

Dr.AttieaMarie-AComparativeStudyofStandardCostingPractices:.

firms, as evidence in Tables 2 and 3. Thus,we cannot generalize

ourfindingstolargecompaniesintheUAE.Attheacademiclevel,
thisresearchshowsthatstandardcostingisstillavaluabletoolfor
management accounting curriculum, at least for the UAE,
Malaysia and UK.Nevertheless, the interesting issues to be
pursuedinfuturestudiesareashereunder:

Identification of contingent factors underlying the

persistenceofstandardcosting.

Is the use of standard costing pre-empting the use of

contemporarymanagementaccountingtoolssuchasABC,
JIT, Target Costing (TC), Quality Cost Reporting (QCR)
and TQC? Or, are companies in UAE, Malaysia and UK
are actually using standard costing in conjunction with
othercontemporarytools?

Whether our findings hold for other GCC and other

Europeancountries.

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Connolly, McNair, C. J, Watts, Ted, Polutnik, Lidija, (2009),

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Dr.AttieaMarie-AComparativeStudyofStandardCostingPractices:.

RespondentName:.
Address:..
Contactnumber:..

RolesandResponsibilitiesofManagementAccountants

I.

PreliminaryInformation:

Pleaseprovidethefollowingpersonalinformation:

A.YourAgeyears
B.Gender:Male.

Female.

C.Nationality..
D.JobTitle.
....

E.Howlonghaveyouheldthisjobtitle?

.Years.Months

FHowlonghaveyouhavebeenwiththiscompany?

.Years..Months

G.HighestEducationalDegreethatyou
hold

H.Doyouhaveanyprofessionalcertifications?Yes..No.
Ifyes,pleasestate..

I.WhatistheTotalAssetsofyourCompany?...........................

J.WhatistheTotalEquityofyourCompany?............................

K.Howmanypersonsareemployedinyour
company?.Persons

L.Whatisthenatureofyourcompanysoperations?(Pleaseprovidea
brief
description)
.................................................................................................................

JRLoftheFacultyofCommerceforScientificResearch.Alex.Unv.Vol.47No.1JAN.2010

..................................................

.....................................................................................................
.....................

M.Towhomdoyounormallyreport?(Pleaseticktheappropriate
choice)

IreportdirectlytotheChiefExecutiveOfficer(CEO).

IreportdirectlytotheGeneralManagerwhoisbelowthe
(CEO).

IreportdirectlytotheFinancialManagerwhoisbelowthe
GeneralManager

IreportdirectlytotheHeadoftheAccountingDepartment
whoisbelowtheFinancialManager
Others,Ireportdirectlyto.

II.

ManagerialPerformance

The following are several statements related to budgets and

activities that could be used in performance appraisal. For each
statement, please circle the appropriate cell to indicate the extent
ofyouragreementordisagreementbycircledoneofthefollowing
scales:

StronglyDisagree

StronglyAgree

Dr.AttieaMarie-AComparativeStudyofStandardCostingPractices:.

TasksandRelatedActivities
Iparticipateindetermining
goals,policiesandcourseof
action;workscheduling,
budgeting,settingup
procedures,programming.
Iparticipateincollectingand
preparinginformationfor
records,reportsandaccounts;
measuringoutput;
inventorying,jobanalysis.
Iparticipateinexchanging
informationwithpeoplein
otherorganizationalunitsin
ordertorelateandadjust
programs;advisingother
departments,liaisewithother
managers.
Iparticipateinassessmentand
appraisalofproposalsorof
reportedorobserved
performance;employee
appraisals,judgingoutput
records,judgingfinancial
reports;productinspection.
Iparticipateindirecting,leading
anddevelopingour
subordinates;counseling,
trainingandexplainingwork
rulestosubordinates;assigning
workandhandlingcomplaints.
Iparticipateinmaintainingthe
workforceofourunit;
recruiting,interviewingand
selectingnewemployees;
placing,promotingand
transferringemployees.

Scale
1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7

JRLoftheFacultyofCommerceforScientificResearch.Alex.Unv.Vol.47No.1JAN.2010

Iparticipateinpurchasing,
sellingorcontractingforgoods
orservices,contacting
suppliers,dealingwithsales
representatives;collective
bargaining...
Iattendconventions,
consultationwithotherfirms,
businessclubmeetings,public
speeches;communitydrives;
advancingthegeneralinterest
ofourorganization.
Icanratemyoverallperformance
forlastyearat
Iaminvolvedinsettingthe
budgets
Appropriatejustificationsare
providedwhenbudgetrevisions
arerequested
Ioftenstatemyrequests,opinions
and/orsuggestionsaboutthe
budgettomymanagerwithout
beingasked
Ihavenomuchinfluenceonthe
finalbudget
Iratemycontributionto
developingthebudgetat
Iamalwaysclearabout
whatisnecessaryto
performwellonmyjob.
Ihaveadequateinformationto
makeoptimaldecisionsto
accomplishmyperformance
objectives.

9
10
11

12

12
13
14

15

1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7
1 2 3 4 5 6 7
1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7
1 2 3 4 5 6 7
1 2 3 4 5 6 7

1 2 3 4 5 6 7

Dr.AttieaMarie-AComparativeStudyofStandardCostingPractices:.

III.

UsageofStandardCosts
1.Doesyourcompanyusestandardcosting?
Yes
. No.

2.Iftheanswertotheabovequestionisyes,pleaseindicatethe
extenttowhichstandardcostingisusedineachofthe
followingtasks,otherwise,gotothenextitem3:

Less
extent

Tasks

Costcontrolandperformance
evaluation

2 Costinginventories
3

Computingproductcostfor
decisionmaking

Toa
Great
Extent

1 2 3 4 5 6 7
1 2 3 4 5 6 7
1 2 3 4 5 6 7

4 Asanaidtobudgeting

1 2 3 4 5 6 7

5 Dataprocessingeconomies

1 2 3 4 5 6 7

Others

1 2 3 4 5 6 7

3.Pleaseindicatethemethodyourcompanyusestosetmaterial
andlaborstandards:

Standardsbasedondesign/engineeringstudies

Observationsbasedontrialruns

Workstudytechniques

Averageofhistoricusage


JRLoftheFacultyofCommerceforScientificResearch.Alex.Unv.Vol.47No.1JAN.2010

4.pleaseindicatethetypeofstandardsemployedbyyourcompany

Maximumefficiencystandards
Achievablebutdifficulttoattainstandards
Averagepastperformancestandards
Others

5.Howfrequentlyarestandardcostsformallyreviewed?

Monthlyorquarterly
Semi-annually
Annually
Continuously

Whenthevariancesimplythatthestandardshave
changed

Others.

6.PleaseindicatetheMethodusedtodetermineifaparticular
varianceshouldbeinvestigated

Noformalmethodused(decisionsbasedonmanagerialjudgment)
Wherethevarianceexceedsaspecificmonetaryamount
Wherethevarianceexceedsagivenpercentageofstandard
Statisticalbasisusingcontrolchartsorotherstatisticalmodels
Others

Dr.AttieaMarie-AComparativeStudyofStandardCostingPractices:.

7.Pleaseindicatehoweachofthefollowingcostvariancesisimportantasanaidtocontrol
organization
LessImportant

Veryimportant
Costvariances

Materialprice

Materialusage

Materialmix

Materialyield

Wagerate

Laborefficiency

Variableoverheadefficiency

Overheadexpenditure

Fixedoverheadvolume

10

Fixedoverheadvolumeefficiency

11

Fixedoverheadvolumecapacity

12

Salesvolume

13

Salesprice

JRLoftheFacultyofCommerceforScientificResearch.Alex.Unv.Vol.47No.1JAN.2010


JRLoftheFacultyofCommerceforScientificResearch.Alex.Unv.Vol.47No.1JAN.2010

Ownershipconcentrationandfirmfinancial
performance
EvidencefromSaudiArabia
Dr.MohamedMoustafaSoliman
ArabAcademyforSciences&Tech.

Abstract
Theeffectofownershipconcentrationonafirmsperformanceis
animportantissue inthe literatureof financetheory.Thisstudy
seeks to examine the effect of ownership concentration on firm
financial performance in Saudi Arabia, using pooled crosssectionalobservationsfromthelistedSaudifirmsforthreeyears
between 2006 and 2008. I find that firm financial performance
measured by the accounting rate of return on assets and rate of
return on equity generally improves as ownership concentration
increases.Ialsofindthatthereexistsahump-shapedrelationship
betweenownershipconcentrationandfirmperformance,inwhich
firm performance peaks at intermediate levels of ownership
concentration.Thestudyprovidessomeempiricalsupportforthe
hypothesisthatasownershipconcentrationincreases;thepositive
monitoring effect of concentrated ownership first dominates but
later is outweighed by the negative effects, such as the
expropriation of minority shareholders. The empirical findings
shedlightontheroleownershipconcentrationplaysincorporate
performance, and thus offer insights to policy makers interested
in improving corporate governance systems in an emerging
economysuchasSaudiArabia.

Keywords: corporate governance, ownership concentration,

financialperformance,andSaudiArabia.


Dr.MohamedMoustafaSoliman-Ownershipconcentrationandfirm

1. Introduction

Theeffectofownershipconcentrationonafirmsperformanceis
animportantissueintheliteratureoffinancetheory.Ownership
concentration may improve performance by decreasing
monitoring costs (Shleifer and Vishny, 1986). However, it may
also work in the opposite direction. There is a possibility that
large shareholders use their control rights to achieve private
benefits. Ownership concentration are considered as important
factorsthataffectafirmshealth(ZeitunandTian,2007).

The idea that ownership concentration is one of the main

corporate governance mechanisms influencing the scope of a
firms agency costs is generally accepted (Shleifer and Vishny,
1997). Also, it has been shown in various contexts that better
corporate governance is associated with higher financial
performance.Differentcountrieshavedevelopeddistinctpatterns
of corporate governance. In this respect, different solutions to
corporategovernanceproblemsmaybeappropriatedependingon
the institutional setting of each country. Therefore, it might be
necessary to look into a countrys unique corporate structures,
rules, and environments when analyzing the link between
corporategovernanceandperformanceinthecountry.

Itisworthnotingthatmostresearchonownershipconcentration
and firm performance has been dominated by studies conducted
indevelopedcountries.However,thereisanincreasingawareness
that theories originating from developed countries such as the
USA and the UK may have limited applicability to emerging
markets.Emergingmarketshavedifferentcharacteristicssuchas
different political, economic and institutional conditions, which
limit the application of developed markets empirical models
(Zeitun and Tian, 2007). Recent studies of corporate governance
suggest that geographical position, industrial development and
cultural characteristics along with other factors affectownership
concentration which in turn have impacts on a firms
performance (Pedersen and Thompson, 1997). There is a


JRLoftheFacultyofCommerceforScientificResearch.Alex.Unv.Vol.47No.1JAN.2010

significantlackofappliedstudiesdealingwithfinancialdistressin
MiddleEasterncountriessuchasSaudiArabia.

The main objective of this study is to examine the effect of

ownership concentration on firm financial performance of listed
companies in Saudi Arabia. After a decade of an extensive
privatization program, a unique feature of the Saudi stock
exchange is that many listed companies have varying ownership
structureandconcentrationbecausemanyofthemwereformerly
family-ownedenterprises,beforebeingrestructuredandlistedon
thestockexchange.Theresultsconsistentlysupportthepotential
association between ownership concentration and firm financial
performance, though the relationship differs across different
groupofowners.
Theorganizationofthepaperisasfollows:Section2reviewsthe
existing literature on the effects of ownership concentration on
firmperformance.Section3presentsforhypothesesdevelopment.
Section 4 provides a discussion of the variables tested, model
development and sample. Section 5 presents a discussion and
summaryoftheresults.Section6concludesthestudy.

2. Literature review
The effects of ownership concentration on firm performance are
theoretically complex and empirically ambiguous. Concentrated
ownership is widely acknowledged to provide incentives to
monitormanagement.Largeshareholdersmighthavethegreater
incentive to improve firm performance than do dispersed
shareholders. Furthermore, concerted actions by large
shareholders are easier than by dispersed shareholders. In other
words, large shareholders have both an interest in getting their
money back and the power to demand it. However, despite the
obvious benefits from concentrated ownership,attention hasalso
beenfocusedontheadverseeffects.Forexample,whiledispersed
ownership offers better risk diversification for investors,
concentrated ownership imposes increasing risk premia because
of risk aversionoflarge shareholders(Demsetzand Lehn, 1985),
causing potential under-investment problems. A more important


Dr.MohamedMoustafaSoliman-Ownershipconcentrationandfirm

issueinthisrespect is that concentratedownership couldlead to

another sort of agency problem, that is, conflicts between large
shareholders and small shareholders. Large shareholders have
incentives to use their controlling position to extract private
benefitsattheexpenseofminorityshareholders(Lee,2008).

Since concentrated ownership has its own specific benefits and

costs,it istheoreticallyopenwhich onedominates.Justasinthe
theoreticalconsideration,whilesomeempiricalresearchsupports
the positive relationship, other empirical research suggests that
concentrated ownership does not necessarily lead to better firm
performance. Several papers (Short, 1994; Shleifer and Vishny,
1997;Gugler,2001)providecomprehensivesurveysandshowthat
the overall empirical evidence on the effects of ownership
concentrationonfirmperformanceismixed.

There have been different studies examining the effects of

ownership concentration on performance. Hill and Snell (1988)
show that ownership structure affects firm performance as
measuredbyprofitability throughstrategicstructure. Later,Hill
and Snell (1989) confirm this positive relation for US firms by
taking productivity as a measure of performance. On the
contrary, McConnell and Servaes (1990) do not find evidence
supporting any direct effect of large shareholders on firm value.
Nevertheless, the empirical evidence in Agrawal and Mandelker
(1990) supports the hypothesis proposed by Shleifer and Vishny
(1986)thatthe existenceoflarge ownersora highconcentration
ownership leads to better management and also better
performance, especially when ownership is concentrated in
institutionalinvestorsratherthanindividualinvestors.Therefore,
institutionalownershipcouldincreaseafirmsperformance.

Wu and Cui (2002) study the effect of ownership structure on a

firmshealth.Theyfoundthatthereisapositiverelationbetween
ownership concentration and accounting profits, indicated by
return on assets (ROA) and return on equity (ROE), but the
relationisnegativewithrespecttothemarketvaluemeasuredby


JRLoftheFacultyofCommerceforScientificResearch.Alex.Unv.Vol.47No.1JAN.2010

theshareprice-earningratio(P/E)andmarketpricetobookvalue
ratio (M/B). Also, the contribution of government (state) and
institution ownership is significantly positive to company profit,
while negative to the market value. Xu and Wang (1997)
investigated whether ownership structure has significant effects
on the performance of publicly listed companies in China. They
findthatownershipstructures,boththemixandconcentrationof
ownership have a significant effect on the performance of stock
companies. There is a significant and positive relationship
between ownership concentration and firms profitability. Also
the effect of ownership concentration is stronger for companies
dominatedbyshareholdersthanforthosedominatedbythestate.

Thereisalsosomeempiricalevidenceofanegativeimpactoflarge
equity holders on firm performance. Lehmann and Weigand
(2000), focusing on German corporations, find indeed a negative
effectofownershipconcentrationonfirmperformance.Leechand
Leahy (1991) analyse the implications of the separation of
ownership from control for a UK firm value. They describe
ownershipstructureusingseveralmeasuresofconcentrationand
controltypes.Therefore,ownershipstructureisexpectedtoaffect
a firms performance through the effects of ownership
concentration.Theyfoundthatthereisanegativeandsignificant
relationshipbetweenownershipconcentrationandfirmvalueand
profitability.AnotherstudyoftheBritishcase,byMudambiand
Niclosia (1998), confirms this negative relationship between
ownership concentration and performance. Prowse (1992)
examines the structure of corporate ownership in a sample of
Japanese firms in the mid-1980s. His empirical work indicated
thatthereisnorelationshipbetweenownershipconcentrationand
profitability. Also, Chen and Cheung (2000) found a negative
relationshipbetweenconcentratedownershipandfirmvaluefora
sample of 412 publicly listed firms in the Hong Kong stock
exchangethrough1995-1998.

A nonlinear relationship between ownership concentration and

firmperformanceisanotherimportantissueinempiricalanalysis.
Thomsen and Pedersen (2000) show empirically that firm


Dr.MohamedMoustafaSoliman-Ownershipconcentrationandfirm

performance first improves as ownership is more concentrated,

buteventuallydeclinesinthelargestEuropeancompanies.
It indicates that, at high levels of ownership concentration, the
benefit of concentrated ownership is outweighed by the negative
effects. Among the negative effects, the expropriation of small
shareholders by large shareholders is noteworthy. Porta et al.
(1999) find that the main problem in large firms of 27 advanced
countries may be the potential expropriation because controlling
shareholders have control rights significantly in excess of cash
flow rights via pyramid structure. Using data for public
companies in East Asia, Claessens et al. (2002) show that firm
market value increases with the cash-flow ownership of largest
shareholders, but drops when the control rights of largest
shareholdersexceedtheircash-flowownership.Similarresultsare
oftenfoundinKorea(Joh,
2003; Baek et al., 2004). Interestingly, evidence shows that, in
emerging economies, control rights in excess of cash flow rights
are related to lower firm values, but not enough to offset the
benefits of concentrated ownership (Lins, 2003). However,
according to Sanchez-Ballesta and Garca-Meca (2007), the
relationship is moderated by institutional environment. The
relationship is stronger in continental countries than in AngloSaxon countries, which would support the argument that
ownership is more positively related to firm performance in
countrieswithlowerlevelsofinvestorprotection.

In spite of all these efforts to investigate the effect of ownership

concentration on firms performance until now there are few
studies of the effect of ownership concentration on firms health
especiallyintheMiddleEast.

3.Hypothesesdevelopment

Thisstudyseekstodeterminewhetherownershipstructureaffects
firm financial performance in Saudi Arabia listed companies.
Ownership structure is analyzed in terms of ownership
concentrationandidentity.Accordingtoagencytheory,


JRLoftheFacultyofCommerceforScientificResearch.Alex.Unv.Vol.47No.1JAN.2010

ownership structure should affect the efficiency of monitoring

mechanisms. Traditionally, the theory holds that concentrated
ownership should mitigate the agency problem. Based on the
traditional agency theory, the study predicts that ownership
concentration positively affects firm financial performance. The
firsthypothesistobetestedisasfollows:

H1: Ownership concentration is positively associated with firm

financialperformance.

However,asdiscussedabove,thenegativeeffectsofconcentrated
ownership are shown to be considerable. The positive and
negativeeffectscouldbecombinedtodevelopthehypothesisthat
at low levels of ownership concentration, firm performance
improves as ownership concentration rises, but at high levels of
ownership concentration, an inverse relation between ownership
and performance is observed. Thus the second hypothesis is as
follows:

H2: There is a hump-shaped relationship between ownership

concentration and firm financial performance.

4.Researchmethod
4.1.Sample
Thedatausedinthisstudyincluded 64publiclylistedcompanies
on the Saudi Stock Exchange (SSE), over the period 2006-2008,
formingapproximately67percentofthetotalpopulationoffirms
listed on the SSE, and fairly represents a wide cross-section of
industries.Thebankingandinsurancesectorsarenotincludedin
this study as the characteristics of these firms aredifferentfrom
thefirmsinotherindustrialsectorsintermsoffinancialstatement
profitability measures and liquidity assessment (Zeitun and Tian
2007). All of the data were collected from official Saudi Stock
Exchangewebsite(tadawul).


Dr.MohamedMoustafaSoliman-Ownershipconcentrationandfirm

4.2. Variables selection

Using pooled data for the listed companies in the SSE, three
ownership structure variables are used in the study. As a proxy
for ownership concentration, the percentage of shares held by a
controlling shareholder (labeled as CR) is used. The controlling
shareholder refers to a group of shareholders who control the
company,suchasshareholdersowningsubstantialequitystakein
a company, their family members, and affiliated entities (Lee,
2008).
Two variables are selected as a proxy for firm financial
performance: return on assets ratio (ROA) and return on equity
ratio (ROE). Several control variables are introduced in the
study: firm size, leverage, liquidity, and business cycle. Natural
logarithm of total assets (LNA) and natural logarithm of total
sales(LNS)areincludedtocontrolforfirmsize.Asforleverage,
equity to assets ratio (EAR) is employed to control for capital
structure effect, and in order to control for long-term financial
distress,liabilitiestoequityratio(LER)isutilized.Withregardto
liquidity, current ratio (current assets to current liabilities ratio,
CUR)isawell-knownliquidityratioandisutilizedasaproxyfor
afirmsfinancialcapacitytomeetitsshort-termfinancialdistress.
A quick ratio (QKR) is also employed, whichis stricter than the
current ratio, becauseitsubtractsinventoryfrom currentassets.
Eachfirmsinventory tototal assets ratio(IVA)isintroduced to
control for the effect of business cycle. The description of the
variables and summarystatistics for thesamplearepresentedin
TableI.


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TableI:DescriptionofVariablesandSummaryStatistics
VARIABLE

Performance

Ownership
Concentration
Size

Leverage

Liquidity

Business
Cycle

LABEL

ROA
ROE
CR

LNA
LNS
EAR
LER
CUR
QKR
IVA

DESCRIPTION

MEAN

MEDIAN

MIN

Netincome/totalassets
Netincome/totalequity
Thepercentageofsharesheldbylarge
shareholders
NaturalLogarithmoftotalassets
NaturalLogarithmoftotalsales
Equitytototalassetsratio
Liabilitiestoequityratio
Currentassetstoliabilitiesratio
Quickratio
Inventorytototalassetsratio

6.3873
8.5689
25.156

9.8755
7.0381
.4928
1.3856
2.5998
1.9455
.0558

1.9800
3.1500
15.000

9.8200
9.0600
.5200
.8100
2.4100
1.8800
.0300

-8.87
-13.14
5.00

8.06
.00
.02
.08
.50
.20
.00

M
A
X
43.45
54.29
70.00

11.43
11.18
.92
5.24
6.99
4.56
.45

4.3. Regression models

To provide empirical testing to the hypotheses addressed in the
study, a linear-multiple regression analysis was used to test the
association between the dependent variables of firm financial
performance and the independent variable of ownership
concentration.
Thefollowingtwomodelsareestimated:
ROA= 0+ 1CR+2LNA+3LNS+4EAR+5LER+6
CUR
+7QKR+8IVA+(1)
ROE=0+ 1CR+2LNA+3LNS+4EAR+5LER+6
CUR
+7QKR+8IVA+(2)
Where ROA, return on assets; ROE, return on equity; CR,
percentage of shares held by a controlling shareholder; LNA,
naturallogarithmoftotalassets;LNS,naturallogarithmoftotal
sales;EAR,equitytoassetsratio;LER,liabilitiestoequityratio;
CUR, current ratio; QKR, quick ratio; and IVA, inventory to
assetsratio.

TableIIrepresentsacorrelationmatrixfortheselectedvariables,
The Pearsons correlation matrix shows that the degree of


Dr.MohamedMoustafaSoliman-Ownershipconcentrationandfirm

correlation between the independent variables is either low or

moderate,whichsuggeststheabsenceofmulticollinearitybetween
independent variables. As suggested by Bryman and Cramer
(1997), the Pearsons R between each pair of independent
variablesshouldnotexceed0.80;otherwise,independentvariables
withacoefficientinexcessof0.80maybesuspectedofexhibiting
multicollinearity. Correlations coefficients in the sample are
withinanacceptablerange.

Table II. Correlation coefficients Matrix of the variables used in

thestudy:
ROAROECRLNALNSEARLERCURQUKIVA

ROA1
ROE.3221
CR.203.3061
LNA.020.088.5881
LNS.332.423.220.0721
EAR.569.530-.017-.399.1661
LER-.388-.480-,058,229-.129-.5021
CUR.663.648.123.040.408.610-.4191
QUK.530.548.137.016.290.647-.588.6471
VIA.047.141.062-.108.328-.034.057-.017-.1311

5. Results
The results of the regression analysis provides evidence that
ownership concentration has positive effects on firm financial
performance. Table III presents the regression analysis for the
financial performance variables (ROA & ROE), using binary
logisticprocedure.Theexplanatorypowerofthetwomodelsis


JRLoftheFacultyofCommerceforScientificResearch.Alex.Unv.Vol.47No.1JAN.2010

0.227and0.324respectively.Theresultsshowthatthereturnon
assets ratio (ROA) is positively associated with ownership
concentration (sig. = 0.00). Firm financial performance
representedbyreturnonequity(ROE)alsoasignificantvariable
withapositivesign(sig.=.001).
ThesignificantimpactofconcentrationratiosonROEandROA
is in support of the Shleifer and Vishny (1986) hypothesis that
large shareholders may reduce the problem of small investors,
and hence increase the firms performance. These results are
consistentwithAbdelShahid (2003);thatROAandROEarethe
most important factor used by investors rather than the market
measure of performance. This finding is also consistent with the
resultsofWuandCui(2002);Zeitunet al.(2007)andLee(2008),
that there is a positive relationship between ownership
concentration and accounting profits, indicated by ROA and
ROE.
The effects of some control variables on firm financial
performance are confirmed to be significant in the regression.
Among control variables, liquidity is noticeable. The relation
between the liquidity variables (CUR and QKR) and the
dependent variables is shown to be statistically significant: 0.00
(t=7.763), 0.00 (t=6.747) for ROA, and 0.00 (t=4.986) and 0.00
(t=4.101) for ROE. No significant association was foundbetween
theremainingcontrolvariablesandfirmfinancialperformance.


Dr.MohamedMoustafaSoliman-Ownershipconcentrationandfirm

TableIII.Theregressionresultsofthevariablesusedinthestudy:

ROA

ROE

SE

Constant

7.07

19.38

CR

.237

LNA

Coeffi.

Sig.

SE

.365

.716

7.964

13.821

.055

.375

4.306

.000

.326

-921

1.84

-.108

-1.043

.301

LNS

-.037

.228

-.013

-.101

EAR

19.01

7.215

.385

LER

-.396

.964

CUR

14.76

QUK
IVA

Coeffi.

Sig.

.250

.803

.090

.365

3.616

.001

-1.638

3.023

-.065

-.542

.590

.872

.438

.374

.108

1.171

.247

2.635

.011

7.451

11.845

.107

.629

.532

-.050

-.411

.683

-3.618

1.582

-.321

-2.287

.026

1.901

2.108

7.763

.000

15.563

3.121

1.572

4.986

.000

-17.17

2.545

-1.827

6.747

.000

-17.14

4.179

-1.289

4.101

.000

-24.07

10.75

-.171

-2.240

.029

-8.678

17.648

-.432

.491

.625

AdjustedRSquire.735

AdjustedRSquire.643

F 23.176

F 15.408

Significance.000

Significance.000

Where ROA, return on assets; ROE, return on equity; CR,

percentage of shares held by a controlling shareholder; LNA,
naturallogarithmoftotalassets;LNS,naturallogarithmoftotal
sales;EAR,equitytoassetsratio;LER,liabilitiestoequityratio;
CUR, current ratio; QKR, quick ratio; and IVA, inventory to
assetsratio.

In relationtothe second hypothesisthatahump-shapedrelation

existsbetween
ownership concentration and firm performance, Ramsey
Regression Equation Specification Error Test (RESET) is
conducted. The RESET tests whether nonlinear combinations of
the independent variables help explain the dependent variable
(Ramsey,1969).Thetestresults(p<4.17e 08forROA;p<2.8e


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16 for ROE) confirm the nonlinear relationship between

ownership concentration and firm performance. In order to test
the hump-shaped pattern, piecewise OLS regression and
quadraticOLSregressionareused.

The results of the piecewise regression and the quadratic

regressioncanbeunderstoodassupportingtheideaofthehumpshaped relationship between ownership concentration and firm
financial performance. The effect of ownership concentration on
firm performance is positive at lower levels of ownership
concentration, but negative at higher levels of ownership
concentration. The piecewise regression results show that firm
performanceincreasesasownershipconcentrationincreasesupto
the point at which ownership concentration reaches 60%, but
decreases slowly after the peak point. The slopes in each
regressionareSig.0.11(t=4.30),Sig.0.09(t=3.61)respectively,at
lowlevelsofownershipconcentration.Athighlevelsofownership
concentration,tehslopesare-0.04,-0.10,.Theresultsreflects the
hump-shapedrelationbetweenownershipconcentrationandfirm
performance.Especially,theresultsprovidestrongevidenceofthe
rapid increase in ownership concentration at lower levels. The
non-linear hump-shaped relation of the present study is
completely matched with Belkaoui and Pavlik (1992), Xu and
Wang (1999) on China. The results provide some empirical
support for the hypothesis that as ownership concentration
increases; the positive monitoring effect of concentrated
ownershipfirstdominatesbutlaterisoutweighedbythenegative
effects,suchastheexpropriationofminorityshareholders.

6. Conclusion
Thepossibleimpactofownershipconcentrationonfirmfinancial
performancehasbeenacentralquestioninresearchoncorporate
governance, but evidences on the nature of this relationship has
been decidedly mixed. While some theories and empirical
investigations suggest that ownership concentration affects firm
financialperformance,someotherssuggesttheirrelevanceofthe
relationship between ownership concentration and firm financial
performance.


Dr.MohamedMoustafaSoliman-Ownershipconcentrationandfirm

This study investigates the relationship between ownership

concentration and firm financial performance. Using panel data
for 64 publicly listed companies on the Saudi Stock Exchange
(SSE), over the period 2006-2008, the study finds that firm
performanceimprovesasownershipconcentrationincreases.The
empirical findings in this study shed light on the role ownership
structure plays in firm financial performance, and thus offer
insights to policy makers interested in improving corporate
governance systems in an emerging economy such as Saudi
Arabia. This finding is consistent with the prediction of agency
theory revealing that lower level ownership concentration has
negativeperformanceeffect,whilehigherlevelhaspositiveeffect.
Explanatory power of other governance and control variables of
themodelsalsoproduceexpectedresults.

The data also provide strong evidence that there exists a humpshapedrelationship
betweenownershipconcentrationandfirmfinancialperformance,
in which firm performance peaks at intermediate levels of
ownershipconcentration.Thefindingprovidesempiricalsupport
for the hypothesis that as ownership concentration increases, the
positive monitoring effect of concentrated ownership first
dominatesbutlaterisoutweighedbythenegativeeffects,suchas
the expropriation of minority shareholders. Given substantial
ownership concentration in Saudi firms, the influence of
controllingshareholderscanleadtotheexpropriationofminority
shareholders. Although Saudi Arabia has made significant
progress in legal and regulatory reforms, the current legal
frameworkisstilldeemedtobetooweakto
preventtheexpropriationofminorityshareholders.


JRLoftheFacultyofCommerceforScientificResearch.Alex.Unv.Vol.47No.1JAN.2010

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