Basmah Maziad ALTUWAIJRI, Lakshmi KALYANARAMAN / Journal of Asian Finance, Economics and Business Vol 7 No 8 (2020) 259–268 259

Print ISSN: 2288-4637 / Online ISSN 2288-4645
doi:10.13106/jafeb.2020.vol7.no8.259

CEO Education-Performance Relationship: Evidence from Saudi Arabia

Basmah Maziad ALTUWAIJRI1, Lakshmi KALYANARAMAN2

Received: June 04, 2020  Revised: June 21, 2020  Accepted: July 09, 2020

Abstract
The study investigates the association between CEO education and firm performance with a sample of 85 nonfinancial firms listed on
the Saudi stock exchange during 2018 applying ordinary least squares method. CEO education is defined by three variables, the level of
education, if the degree-granting institution is domestic or foreign, and if the highest degree is in management or other fields of study.
Financial performance is measured by return on assets and return on equity. Firm size, age, liquidity and growth are introduced as control
variables. The study shows that 58 CEOs of the firms studied are graduates, 38 have obtained their degree from a domestic institution
and 44 have a management degree. Graduate CEOs are found to enhance performance. Graduating from a domestic institution influences
performance positively. Management degree of CEO does not seem to impact performance. Firm size, liquidity and growth are positively
associated with performance. Firm age does not explain performance differences of firms. Results are robust to performance measures. The
findings of the study suggest that firms can benefit from a CEO hiring policy that emphasizes on the minimum qualification set as graduation
or higher, education from a domestic institution and no undue weight on management qualification.

Keywords: CEO Education, Firm Performance, Management Degree, Business Leadership, Saudi Arabia

JEL Classification Code: I21, L25, M12, M51, N15

1. Introduction are listed (Bertrand & Scholar, 2003; Bhagat, Bolton &
Subramanian, 2010; Colbert, Barrick & Bradley, 2014; Hiller
The empirical literature has well established that CEO & Hambrick, 2005). The major challenge that empirical works
(Chief Executive Officer) characteristics can explain the face is to define a quantifiable measure that represents these
differences in firm performance (Adams, Almeida & Ferreira, attributes (Falato, Li & Milbourn, 2015). Since education
2005; Graham, Harvey & Puri, 2013; Kaplan, Klebanov weighs heavily on the CEO recruitment and compensation,
& Sorensen, 2012; King, Srivastav & Williams, 2016; it is proposed as the objective measure of CEO’s ability to
Malmendier, Tate and Yan, 2011). In search of answer to the impact firm performance (Bhagat et al., 2010; Graham, Li
question, “What characteristics of CEO can enhance firm & Qiu, 2012). This choice is justified by empirical works
performance?”, several CEO characteristics like narcissism, that proxy CEO education for technical and managerial
leadership, team-building ability, overconfidence, integrity, competency (Bowers & Seashore, 1966), ability to handle
efficiency, gaining stakeholders’ trust, efficiency, etc., complex information and take fast decisions (Hunter, 1986),
receptivity to new ideas (Thomas, Litschert & Ramaswamy,
1991), entrepreneurial drive (Robinson & Sexton, 1994),
cognitive ability (Wally & Baum, 1994), prestige (Certo,
1
 irst Author. Management Consultant, Basmah Altuwaijri Office for
F 2003), ability to cope with uncertain scenarios (Gottfredson,
Consultancy Services, Riyadh, Saudi Arabia.
Email: [email protected] 2003), openness to innovation and adaptability to change
Corresponding Author. Professor, Department of Finance, King
2
(Ng & Feldman, 2009), thinking process (Gottesman &
Saud University, Riyadh, Saudi Arabia [Postal Address: P. O. Box Morey, 2010), ability to devise effective strategies (Xiaowei
305220, Riyadh, 11361, Saudi Arabia]
Email: [email protected]
& Zhang, 2010), and managerial effectiveness (Saidu, 2019).
However, the literature on CEO education-performance link
© Copyright: The Author(s)
This is an Open Access article distributed under the terms of the Creative Commons Attribution is still evolving.
Non-Commercial License (http://Creativecommons.org/licenses/by-nc/4.0/) which permits
unrestricted noncommercial use, distribution, and reproduction in any medium, provided the
Empirical works on CEO education-performance have
original work is properly cited. come up with mixed results. Some works show a positive
260 Basmah Maziad ALTUWAIJRI, Lakshmi KALYANARAMAN / Journal of Asian Finance, Economics and Business Vol 7 No 8 (2020) 259–268

association (Elsharkawy, Paterson, & Sherif, 2018; King stock return and Tobin’s Q, measures of performance are
et al., 2016), while others show no significant relation employed. The study fails to produce evidence to support
between the two variables (Gottesman & Morey, 2010; CEO education-performance link and concludes that
Jalbert, Furumo & Jalbert, 2011). More research is needed to education may not be a good proxy for CEO’s ability.
bring consensus on CEO education-performance link. This Gottesman and Morey (2010) test the CEO education
research contributes to the literature in at least two significant background and performance link on a sample of 390 US
ways. One, the study attempts to provide a definitive answer firms. Educational background is defined by the type of
to the question whether CEO education influences firm degree and the school selection of the CEO. Performance
performance. Second, most of the studies that investigate is measured by Tobin’s Q. The study finds a significant link
CEO education-performance connection are carried out in between both the type of degree and school selectivity with
the US (Morresi, 2017). There is a need to carry out similar Tobin’s Q. Results are explained by citing the length of time
studies in other countries. This study produces evidence of that lapses between the attainment of formal education and
this link in Saudi Arabia, a country where a similar study becoming CEO. This time gap renders formal education
does not exist. irrelevant.
Koyuncu, Firfiray, Claes and Hamori (2010) examine
2. Literature Review and Hypothesis the importance of the functional specialization of the CEO
Development in operations for performance with a sample of 437 CEOs
from S&P during 1992 to 2005. CEOs with specialization
Several theories offer the framework for understanding in operations are found to perform better than with finance
the CEO education-performance link. Human capital theory specialization. Study attributes the increased dependence
(Becker, 1964; Mincer, 1958) suggests that a firm can profit on operations specialization to enhanced focus on cost
from the cognitive and productivity ability of an individual effectiveness by firms.
derived from the individual’s stock of experience, education Jalbert et al. (2011) examine the level of education and
and skills. The theory argues that the marginal productivity school ranking of CEOs of large US firms during the period,
of labor is determined by education that has the potential to 1997-2006. Performance is assessed by return on assets,
influence the firm’s earnings. The theory proposes a positive return on equity and return on investment. The study shows
CEO education-performance link. Proponents of upper that, while being undergraduate is essential to become CEO,
echelons theory (Hambrick & Mason, 1984) argue CEO a graduate degree is not. Accomplishment of undergraduate
characteristics like experience, values and personality hold degree does not explain differences in return on assets and
the key to understanding the strategic choices of the firm and return on investment, but is significantly and positively
its performance. Empirical testing of the theory suggests that related to return on investment. School rank is found to be
CEOs who are highly educated are more knowledgeable with associated with return on equity. Graduate school ranking
better cognitive ability. This ability positively impacts their is marginally significantly cause variations in return on
approach to decision making and identifying more appropriate assets. While undergraduate school ranking affects return
strategic actions that can positively impact performance on investment positively, graduate school ranking affects the
(Dragoni, Oh, Vankatwyk & Tesluk, 2011; Wang, Holmes variable negatively.
Jr., Oh & Zhu, 2016). Upper echelons theory proposes a King et al. (2016) show that both level of education and
positive association with the level of CEO education and school quality influence bank performance. A sample of 149
performance. Advocates of resource dependence theory large US banks are studied during 1992 to 2011. Results
(Barney, 1991) argue that a firm can gain competitive show CEOs with an MBA have the ability to deliver better
advantage to increase performance from intangible assets performance than their counterparts. MBA from a better-
like human capital. To be effective as competitive advantage, ranked school is found to results in CEOs assuming more
the human capital should be valuable, scarce, unique with risk and adopt innovative models of business to achieve
no substitutes. Barney and Arikan (2001) test the theory and better performance. The study concludes that management
conclude that firms with managers of high quality perform degree enhances CEOs’ ability to manage bigger and more
better than their counterparts with less quality managers. complex banks and attain improved performance.
Theories suggest a positive CEO education-performance Cheng, Li and Chih (2020) evaluate if the managerial
link. However, empirical works produce mixed results. ability and firm strategy fit can influence the firm performance
Bhagat et al. (2010) study 1,500 largest US firms in the with a sample of 34285 firm-year observations from US
Standard & Poor’s super-composite 1500 over 1992 to 2007. listed firms during the period, 1992-2014. Along with other
The study employs 22 education-related measures broadly variables, they check if CEO with a management degree can
belonging to two categories, field of study and ranking of impact performance. The results show a positive association
the school. Both short-term, return on assets, and long-term, with performance and a negative relationship with risk.
 Basmah Maziad ALTUWAIJRI, Lakshmi KALYANARAMAN / Journal of Asian Finance, Economics and Business Vol 7 No 8 (2020) 259–268 261

In Europe, Morresi (2017) examines CEO education- investors; however, CEO education may not help enhance
performance relation with a sample of 612 firms of market performance in the short run.
capitalization of over one billion euros listed on stock Saidu (2019) investigates CEO education-performance
exchanges of UK, France, Italy, Spain, Germany and association with a sample of 222 firm year observations
Netherlands during 2006 to 2015. The level of education, relating to financial firms listed in Nigerian stock exchange
quality of school, and study specialization of CEO are over the period, 2011-2016. Results show CEO education is
evaluated against the accounting and market related positively linked to all the three measures of performance
performance. The study finds that CEOs with a higher degree employed by the study. While the association with return
and from a better-ranked school do not boost performance. on assets is statistically significant, the association with the
But, CEOs from top ranked schools are found to enhance other two variables, stock price and return on equity are not
long-term market performance. The study infers the CEO statistically significant.
education helps to reduce information asymmetry problem. Research that tests the CEO education-performance
Ayaba (2012) analyzes the link between the level and comes up with mixed results. Broadly, the empirical works
field of education of 100 CEOs of firms listed on Stockholm employ four broad measures of CEO education, level,
stock exchange on return on assets between 2008 and 2010. ranking, domestic or foreign and field of study. This study
Evidence produced by the study shows that both the level employs three of these measures namely, level, domestic or
of education and the field of study have a limited ability to foreign and field of study. School ranking is not included
explain the performance differences. The study calls for a as all the domestic institutions in Saudi Arabia do not have
focus on the contemporary business challenges to be built ranking by a single agency. The study proposes the following
into the curriculum offered by graduate schools. hypotheses.
Elsharkawy et al. (2018) investigate if the educational
background of CEO of 54 UK listed banks on performance Hypothesis 1: CEOs with a graduate degree perform
during 2005 to 2015. CEO education is defined if CEO has better than CEOs with a lower qualification.
a business degree. Performance is measured by Tobin’s Q,
return on average assets, return on average equity and net De Kort and Vermeulen (2010) suggest that CEOs
interest margin. The study finds that business education has a with higher educational qualification may tend to become
significant positive link to Tobin’s Q and net interest margin, overconfident. This overconfidence may render investment
but an insignificant positive relation to return on average and managerial decisions ineffective, harming performance.
assets and return on average equity. King et al. (2016) contend that both the level and quality of
CEO education-performance is also studied in a few CEO education matter to firm performance. It is hypothesized
developing countries as well. Darmadi (2013) studies 160 that most of the studies in the literature are from developed
firms listed on the Indonesia stock exchange during 2007. country, in a developing country like Saudi Arabia where most
Three measures of educational qualification of CEO and of the firms are family businesses with boards characterized
board members are correlated with two measures of firm by heavy family representation, CEO with higher level of
performance. If a post graduate degree holder, if the degree degree may positively impact performance.
is from a prestigious domestic university, if degree is from a
developed country and if degree is in financial discipline are Hypothesis 2: CEOs with highest educational
the education variables. Performance variables are return on qualification obtained from a domestic institution will
assets and Tobin’s Q. The study shows CEOs with degrees perform better than CEOs with a foreign degree.
from domestic prestigious institution impact performance
better than CEOs without similar qualification. Previous works suggest lack of knowledge about
Lu and Zhang (2015) examine the CEO education- domestic market may constrain the decision-making
performance link with the data of Chinese publicly-listed power of executives. This may diminish performance.
firms from 2003 to 2012. After addressing the endogeneity in (Lord & Ranft, 2000) This is particularly true in case of
the CEO education variable with the instrumental variables emerging markets. (Harvey, Speier & Novicevic, 1999)
of the college entry exam rate in China’s different provinces Darmadi (2013) investigates the influence of education of
in different years, the impacts of cultural revolution on CEO the CEO and the members of the board of directors on firm
education, and the growth environment of the CEO, the performance with a sample of firms from Indonesia. The
authors find that excellent CEO education can significantly evidence shows that CEOs with degree from prestigious
enhance firm value, but cannot significantly affect firms’ domestic institutions enhance performance more than their
accounting profitability and growth rate. These findings counterparts without similar qualification. Saudi Arabia is an
suggest that a CEO with high education background can Islamic country with businesses operating in the Sharia law
enhance the expectation on the value of the firm from framework. This calls for country specific knowledge. The
262 Basmah Maziad ALTUWAIJRI, Lakshmi KALYANARAMAN / Journal of Asian Finance, Economics and Business Vol 7 No 8 (2020) 259–268

study hypothesizes a positive relationship between CEOs 3.1.2.  CEO Education Variables
education from a domestic educational institution, which
can have a greater emphasize on local market conditions and As mentioned in the hypothesis development section,
business environment and firm performance. the study includes three variables relating to CEO education
that measure level of education, location of educational
Hypothesis 3: Performance of firms with CEOs with institution and education background. The first variable
MBA degree may be higher than those without CEOs with relating to the level of CEO education measures if the
MBA degree. CEO has a graduate degree or above. The second variable
is defined by the location of the educational institution
The empirical literature on how effective the CEOs with from which the CEO obtained the highest educational
an MBA degree in delivering higher performance are is qualification. On the basis of the location the institutions are
mixed. Lindorff and Jonson (2013) examine the association classified as domestic or foreign. The third variable is about
between CEO management education on shareholder return the educational background, whether the CEO has a degree
and find no significant relationship. They conclude that in management or other branches. CEOs with a higher
management education may not offer relevant competencies level of education and degree from a domestic institution
at the CEO level. Degree in management enhances CEO’s are expected to enhance firm performance. If CEOs with a
comprehension of sophisticated investment evaluation management degree deliver higher performance than their
techniques is supporting by the findings of some empirical counterparts with a degree from other domains of expertise
works (Graham & Harvey, 2002). This may enhance is hypothesized as management degree is weighs heavily in
performance. As the boards continue to hire CEOs with CEO hiring and compensation decisions.
managerial qualification and compensate them more this
hypothesis is tested in the context of Saudi Arabia. 3.1.3. Control Variables

3.  Data and Methodology Variables that are normally considered by the current
literature are studied. These variables measure firm size,
All non-financial firms listed on the Saudi stock market firm age, liquidity of the firm and growth. Large firms
for which data is available for the study variables for 2018 generally are more diversified, enjoy higher efficiency in
in Standard & Poor’s Capital IQ database are chosen for the operations and suffer less from information asymmetry
study. A sample of 85 firms is chosen through this process. problem (Nguyen & Nguyen, 2020; Rajan & Zingales,
Data on CEO education is extracted from the annual reports 1995; Ramaswamy, 2001; Frank & Goyal, 2003). All these
of each of the company published in Saudi stock market characteristics suggest enhanced performance with size.
website, www.tadawul.sa. Stadler (2007) argues that firms acquire more knowledge with
advancement in age. Coad, Segarra and Teruel (2013) show
3.1.  Variables Studied that productivity, profits, size and equity usage increases
with age. This suggests a positive association between firm
This section describes the dependent and independent age and performance. Age may also diminish performance as
variables studied. matured firms may tend to resist change and are less flexible
(Leonard-Barton, 1992). Liquidity may positively affect
3.1.1.  Performance Variables performance by meeting the firm’s current obligations and
facilitating its smooth function (Nguyen & Nguyen, 2020;
Accounting measures of performance that utilize Nguyen, Pham & Nguyen, 2020). Excessive liquidity may
information from the financial statements are most popular impair performance by managerial expropriation behavior
in empirical works. Use of these measures is rationalized of investing in negative net present value projects (Fama &
on several counts. First, data required for performance Jensen, 1983; Adams & Buckle, 2003). Market to book ratio
assessment can be easily ascertained from published financial proxies a firm’s potential to grow and is positively correlated
statements (Richard, Devinney, Yip & Johnson, 2009. the to performance (Miller & Modigliani, 1961; Myers, 1977;
performance of the firm to the external stakeholders through Rajan & Zingales, 1995).
published financial statements and hence measures based Table 1 below lists the variables included in the study
on these statements is most appropriate. In line with these and their definitions along with their expected relationship
suggestions from the existing literature, the study employs with firm performance.
two measures of performance based on financial statements, Table 2 presents descriptive statistics in panel A and
namely, return on assets and return on equity. correlations in panel B. ROA ranges from 5.77 percent to
 Basmah Maziad ALTUWAIJRI, Lakshmi KALYANARAMAN / Journal of Asian Finance, Economics and Business Vol 7 No 8 (2020) 259–268 263

Table 1: Variables Definition

Variable Definition Abbreviation Expected sign

Firm performance Operating profit before depreciation / Total assets ROA Dependent
Net profit / Shareholders’ equity ROE variables

CEO education Dummy variable equal to 1 if the CEO is a graduate D1 +

and 0 otherwise
Dummy variable equal to 1 if the highest qualification of D2 +
the CEO is from a domestic educational institution and
0 otherwise
Dummy variable equal to 1 if the highest educational D3 +/-
qualification of the CEO is in management and 0
otherwise
Size Log (Total assets) LTA +
Age Log (years since incorporation) AGE +/-
Liquidity Current assets / Current liabilities CRR +
Growth (Total assets – Book value of assets + Market value of MTB +
assets) / Total assets

Table 2: Descriptive Statistics and Correlations

Panel A: Descriptive Statistics

ROA ROE D1 D2 D3 LTA AGE CRR MTB
Minimum -0.058 -0.188 0 0 0 2.001 0.699 0.054 0.291
I quartile 0.037 -0.008 0 0 0 2.906 1.301 1.011 0.966
Median 0.067 0.052 1 0 1 3.279 1.462 1.517 1.112
III quartile 0.116 0.151 1 1 1 3.594 1.613 2.765 1.701
Maximum 0.233 0.336 1 1 1 5.505 2.045 11.749 3.548
Number of 85 81 85 85 85 85 85 81 85
observations
Panel B: Correlations
ROA 1.000
ROE 0.829 1.000
D1 0.049 0.124 1.000
D2 0.101 0.094 -0.330 1.000
D3 0.013 0.059 0.332 -0.139 1.000
LTA 0.513 0.595 -0.033 -0.142 0.161 1.000
AGE -0.053 -0.182 0.008 0.098 -0.238 -0.280 1.000
CRR 0.015 -0.049 0.090 -0.197 0.002 -0.201 0.189 1.000
MTB 0.281 0.120 -0.032 0.214 -0.034 -0.171 0.146 -0.081 1.000

23.31 percent with the median at 6.66 percent. Firms in the Firms in the higher three quartiles have a CEO with a
first quartile have a negative ROE. The median ROE is low graduate degree or higher and with a management degree.
at 5.18 per cent. Firms in the first quartile have a CEO who Only CEOs of firms in higher two quartiles have their highest
has an undergraduate degree from a foreign university, and degree from a domestic university. Looking at the base
educational qualification in a non-managerial discipline. numbers, as many as 58 CEOs studied have a qualification
264 Basmah Maziad ALTUWAIJRI, Lakshmi KALYANARAMAN / Journal of Asian Finance, Economics and Business Vol 7 No 8 (2020) 259–268

of graduate degree or higher. This shows that many firms ROA = f (D1, D2, D3, LTA, AGE, CRR, MTB)
have highly educated CEOs. Only 38 CEOs have obtained ROE = f (D1, D2, D3, LTA, AGE, CRR, MTB)
their highest degrees from a domestic institution while a
larger number of CEOs, 47 have graduated from a foreign
university. CEOs with an MBA and with other degrees are 4. Results
almost equal at 44 and 41 respectively. Correlations between
the study variables show that the multicollinearity may not Regression results are reported in Table 3. Along with
be a problem before testing the models. The study applies the OLS standard errors, as Brooks (2008) suggests the
ordinary least squares regression to test the following White heteroskedasticity-consistent standard errors is also
models. reported to handle the problem of heteroskedasticity. The

Table 3: Regression results

Model 1
Variable Coefficient OLS -SE t-statistic Prob. White-SE t-statistic Prob.
Constant -0.1502 0.0528 -2.8430*** 0.0058 0.0486 -3.0895*** 0.0028
D1 0.0287 0.0133 2.1584** 0.0342 0.0130 2.2088** 0.0303
D2 0.0293 0.0122 2.3943** 0.0192 0.0119 2.4661** 0.0160
D3 -0.0179 0.0120 -1.4893 0.1407 0.0122 -1.4674 0.1466
LTA 0.0577 0.0086 6.6873*** 0.0000 0.0090 6.4466*** 0.0000
AGE -0.0204 0.0246 -0.8288 0.4099 0.0195 -1.0478 0.2982
CRR 0.0060 0.0029 2.1074** 0.0385 0.0019 3.1377*** 0.0025
MTB 0.0389 0.0091 4.2985*** 0.0001 0.0122 3.2025*** 0.0020
Adjusted 0.4085
R-squared
F-statistic 8.8916***
Prob(F- 0.0000
statistic)
Model 2
Constant -0.3231 0.0978 -3.3034*** 0.0015 0.0730 -4.4283*** 0.0000
D1 0.0667 0.0238 2.8022*** 0.0066 0.0239 2.7924*** 0.0068
D2 0.0610 0.0223 2.7384*** 0.0078 0.0232 2.6314*** 0.0105
D3 -0.0288 0.0218 -1.3204 0.1911 0.0203 -1.4219 0.1596
LTA 0.1180 0.0156 7.5729*** 0.0000 0.0156 7.5842*** 0.0000
AGE -0.0510 0.0449 -1.1355 0.2601 0.0355 -1.4344 0.1560
CRR 0.0087 0.0051 1.7201* 0.0899 0.0034 2.5728*** 0.0122
MTB 0.0405 0.0166 2.4453** 0.0170 0.0174 2.3335** 0.0225
Adjusted 0.4538
R-squared
F-statistic 10.0216***
Prob(F- 0.0000
statistic)
Model 1 dependent variable: ROA; Model 2 dependent variable: ROE;
OLS-SE refers to OLS standard errors considering homoscedasticity
White-SE refers to White standard errors considering heteroscedasticity
*** Significant at 1% level; ** Significant at 5% level; * Significant at 10% level
 Basmah Maziad ALTUWAIJRI, Lakshmi KALYANARAMAN / Journal of Asian Finance, Economics and Business Vol 7 No 8 (2020) 259–268 265

results of the regressions run are consistent across both Upper echelons theory postulates that CEO education relates
the measures of firm performance. We find CEOs with to firm performance as it can impact strategic choices.
higher level of qualification and the highest degree from a Resource dependence theory contemplates a positive link
domestic educational institution enhance firm performance, between CEO education and firm performance as CEOs with
while performance of CEOs with a management degree is a higher qualification may prove to be a source of competitive
not found to be statistically significant. Larger firms, firms advantage. Results of this study show a positive CEO
with higher liquidity and higher growth rate are found to be education-performance link. The findings are consistent with
more profitable. Younger firms are found to perform better the contentions of all these theories. It may be inferred that
than older firms. Our results are in line with the proposed CEOs with a higher educational qualification have a better
hypotheses. ability to handle complex business organizations, adopt
Jarque-Bera (1980) test is for checking if the residuals effective profitable strategies and prove to be a valuable
are normal. We find the residuals of both the models are human resource to the firm as suggested by the theories.
normally distributed. The models tested do not suffer from Saudi Arabia is an Islamic country following sharia law
misspecification error and multicollinearity problem as and has a typical business environment of an oil-dependent
evident from the Ramsey regression equation specification economy. All these call for knowledge about the business,
error test and variance inflation factor reported. All the cultural, legal and economic conditions unique to the country.
results of the diagnostic tests show that the results of the This may be the reason why CEOs with the highest degree
models are dependable (see Table 4). from a domestic university deliver superior performance
Our results that CEOs with a higher educational compared to CEOs with their qualification from a foreign
qualification and CEOs who graduate from a domestic university. Firms in Saudi Arabia have a critical role to play in
institution perform better than their counterparts are in line fructifying the Vision 2030 of the country in diversifying the
with the results of some of the previous works (Darmadi, economy from oil by promoting investments in new sectors
2013; King et al., 2016). That a management degree may not like mining, recreation and tourism. Such an emphasis that
help a CEO to deliver a higher performance is also supported provides the direction for future economic growth may hold
by the findings of earlier studies (Lindorff & Jonson, 2013). the key to explaining why CEOs with the higher educational
Finkelstein, Hambrick and Cannella (2009) attribute to the degree and from a domestic institution perform better.
fact that executives arrive at the top after many years of Besides, this may also call for CEOs with technical and
completion of formal education. operational knowledge specific to these sectors may be the
need of the hour rather than a management degree.
5.  Discussion and Conclusion Our findings have important implications for firms in
Saudi Arabia. Like all other GCC countries, Saudi Arabia is
Human capital theory relates CEO education to higher dominated by family firms. In the Gulf region, family firms
earnings thorough increased marginal productivity of labor. play a prominent role in their economic contribution. They

Table 4: Results of Diagnostic Tests

Model 1 Model 2
Jarque-Bera test for normality of 0.6617 0.2537
residuals (0.7183) (0.8809)
Ramsey regression equation 0.32 0.53
specification error test (RESET) (0.8126) (0.6661)
Variance inflation factor Variance inflation factor
D1 1.25 1.28
D2 1.22 1.26
D3 1.19 1.22
LTA 1.18 1.19
AGE 1.15 1.19
CRR 1.13 1.14
MTB 1.07 1.09
P value in parenthesis
266 Basmah Maziad ALTUWAIJRI, Lakshmi KALYANARAMAN / Journal of Asian Finance, Economics and Business Vol 7 No 8 (2020) 259–268

contribute around 60 percent to GDP, hire around 80 percent leadership. Administrative Science Quarterly, 11(2), 238-263.
of the labor force with an estimated stake of around one doi:10.2307/2391247
trillion USD to be passed to the generation next (PwC family Brooks, C. (2008). Introductory Econometrics for Finance (2nd ed.).
business survey, 2019). A large number of these family Cambridge: Cambridge University Press.
businesses already have members of the family in the top
Certo, S. T. (2003). Influencing initial public offering investors
management positions and preparing successors to take over
with prestige: signaling with board structures. The Academy
the leadership of their businesses. KPMG’s family business of Management Journal, 28(3), 432-446 doi:10.5465/
survey of 2017 shows that around 60 percent of the family amr.2003.10196754
businesses surveyed were led by family and 88 percent of the
firms are preparing to find successors for leadership from the Cheng, T.Y., Li, Y., Lin, Y., & Chinh, H. (2020). Does the fit
of managerial ability with firm strategy matters on firm
family (home.kpmg/sa.html). Our findings that firms with
performance. Journal of Asian Finance, Economics and
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perform better than their counterparts should be considered no4.9
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Due to the tedious data collection process the current Coad, A., Segarra, A., & Teruel, M. (2013). Like milk or wine:
does firm performance improve with age? Structural Change
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