Finance Research Letters xxx (xxxx) xxx

Contents lists available at ScienceDirect

Finance Research Letters

journal homepage: www.elsevier.com/locate/frl

Board National Diversity and Dividend Policy: Evidence from

Egyptian listed companies
Nermeen Shehata
School of Business, The American University in Cairo, AUC Avenue, P.O. Box 74, New Cairo 11835, Egypt

A R T I C L E I N F O A B S T R A C T

JEL classification: This paper examines whether the presence of foreign board members leads to higher dividend
G34 yield in top Egyptian listed companies. Using a sample of the top 50 firms listed on the Egyptian
G35 Exchange between 2005 and 2014, I found that there is a significant positive relationship between
M14
board national diversity and dividend yield. This paper contributes to the literature by investi­
M49
gating a novel board diversity variable’s relationship with dividend policies.
Keywords:
Board diversity
Dividend
Egypt

1. Introduction

A key topic in corporate governance research has been board diversity. However, much attention throughout the literature has been
paid to board gender diversity compared to all other diversity variables including age, qualifications, and national diversity, just to
name a few. Board diversity enriches discussions that take place on board, enhances creativity and innovation through sharing new
perspectives and insights, improves problem solving and the board’s overall understanding of the market, enhances corporate lead­
ership and global relationships (e.g., Carter et al., 2003). In addition, board diversity is considered one of the important board
characteristics, and thus governance mechanisms, that enhance the board’s effectiveness in monitoring and guidance (Dixon et al.,
2017). If the board has got identical members, all such benefits would not have taken place. Accordingly, board national diversity is as
important as other diversity aspects, even though there is limited research considering its impact on companies’ behavior compared to
other diversity variables. Foreign board members transfer the best governance practices cross countries (Iliev and Roth, 2018). They
also enhance the monitoring and advising practices in emerging economies (Oxelheim and Randøy, 2003) due to the lack of their
strong connections with the local governments of these economies (Giannetti et al., 2015). Moreover, they also enhance internal
governance and management resources in emerging economies that are perceived to be problematic (Abdelfattah and Aboud, 2020).
Accordingly, it is worth attention to study the impact of the presence of foreign board members on firm behavior in developing and
emerging economies.
Theoretical arguments that support the notion that board national diversity would be beneficial to the board and thus to the firm,
are the same that address board gender diversity (Ruigrok et al., 2007). Board diversity is expected to enhance board independence and
board monitoring, and thus this could be predicted based on the agency theory (e.g., Arfken et al., 2004). Since the board’s function
includes protecting all stakeholder’s interests, the stakeholder theory has also been used to explain the influence of board diversity (e.
g., Kang et al., 2007). Based on the earlier discussion about board diversity not being limited to gender diversity only, this research

E-mail address: n.shehata@aucegypt.edu.

https://doi.org/10.1016/j.frl.2021.102132
Received 19 February 2021; Received in revised form 6 May 2021; Accepted 11 May 2021
Available online 16 May 2021
1544-6123/© 2021 Elsevier Inc. All rights reserved.

Please cite this article as: Nermeen Shehata, Finance Research Letters, https://doi.org/10.1016/j.frl.2021.102132
N. Shehata Finance Research Letters xxx (xxxx) xxx

complements existing studies using the agency and the stakeholder theories to explain the impact of board national diversity.
Moreover, corporate governance literature studies developed countries with much less focus on emerging and developing countries
despite their different characteristics (Claessens and Yurtoglu, 2013). Accordingly, this research addresses this gap by examining board
diversity in Egypt as one of the most important emerging economies in the MENA region (Ingham et al., 2020) which provides a unique
context that is worth attention (Abdelfattah and Aboud, 2020).
Egypt captures various corporate characteristics that are common across the MENA region, such as ownership concentration, less
developed capital markets, preference of debt over equity financing, among others (Tricker, 2009). In addition, the MENA region aims
to increase its foreign direct investment (Sarhan and Ntim, 2018). Countries of the MENA region have got problems with the insti­
tutional rules and the enforcement of such rules which consequently lead to increased corruption rates and instability in the economic
environments (Fainshmidt et al., 2018). Even though the MENA region has got unique characteristics (Sarhan and Ntim, 2018) and a
unique socio-political context (Farah et al., 2021), it is still an understudied region (Fainshmidt et al., 2018). Farah et al. (2021) argue
that the revolutions that took place in the Arab region starting late 2010 were due to the increased corruption levels and weaknesses in
governance. This research responds to Fainshmidt et al. (2018) “call for a more contextualized study of [corporate governance], as
most countries, regions, or markets have unique characteristics and adopt [corporate governance] models and practices that fit their
institutional and national contexts” (Farah et al., 2021, p. 3). According to the most recent literature review conducted by Farah et al.
(2021) on corporate governance in the MENA region, Al-Rahahleh (2017) is the only study that assesses the relationship between
board diversity and dividend policy in Jordan using one dimension of diversity, that is gender diversity.
Results about the impact of board national diversity at the firm level are mixed. On one hand, the presence of foreign board
members enhances the board’s overall effectiveness (e.g., Ruigrok et al., 2007) and leads to better firm performance (e.g., Oxelheim
and Randøy, 2003). On the other hand, Masulis et al. (2012) find a negative impact on firm’s performance. Mixed results regarding the
impact of board national diversity dictate a strong need for further investigation. In addition, in this study, I aim to investigate the
relationship between board national diversity and dividend yield. Research examining the relationship between board diversity and
dividend policies also focus more on addressing board gender diversity (e.g., Gyapong et al., 2019; Trinh et al., 2020). Accordingly,
similar to the aforementioned discussion, studying the behavior of diverse board members should not be limited only to board gender
diversity. To the best of my knowledge, no academic study has investigated to date the relationship between board national diversity
and dividend policies.
The main objective of this paper is to assess to what extent the presence of foreign board members affects dividend yield in top
Egyptian listed companies. I find that a significant positive association exists between board national diversity and dividend yield using
a 10-years period (2005–2014) sample of the top firms listed on the Egyptian Exchange. First, this finding could be generalized to the
MENA region since the sample period is presentable of the region’s context where the period from 2011 to 2013 was the period when
several countries in the region witnessed revolutions taking place against corruption. Therefore, results are of relevance to today’s
economic and market conditions of the MENA region due to its countries’ similar contexts. Second, since the studied period is of
significant importance given the instability Egypt was facing, findings could also be currently extended to other regions that still suffer
from economic and market instability.
Based on the earlier discussion, this study contributes to the literature in four ways. First, this paper extends the literature on board
diversity using a variable that is considered novel; in other words, national diversity, compared to other diversity variables that are
well established, such as gender diversity. Since the presence of foreign board members in developing and emerging economies helps
improve internal governance (Abdelfattah and Aboud, 2020), it is essential to assess such presence on firm’s behavior. Second, it
explores the impact of a new dimension on dividend strategy since board gender diversity has also been addressed in that domain. As
noted by Farah et al. (2021), a single study exists in the literature about the association between one diversity variable, which is gender
diversity, and dividend policy. Therefore, this study extends the literature on the impact of board diversity and dividend policy by
examining the influence of a new diversity variable, that is national diversity, on dividend policy in Egypt; one of the MENA region
countries. Third, it contributes to research about emerging markets, specifically, the MENA region since there is a dearth of it compared
to developed countries. Therefore, this research responds to the call by Fainshmidt et al. (2018) for more research on corporate
governance in the MENA region since it is still an understudied region. Fourth, it supports the importance of the presence of foreign

Table 1
Definition of variables.
Variable Definition

Dividend Yield (DIV) Ratio of cash dividend to share price

Foreign Board Members (BFOR)
Female Board Members (BFEM)
Board Size (BSIZE)
Duality (DUAL)
Leverage (LEV)
Free Cash Flow (FCF)
Return on Assets (ROA)
Firm Size (FSIZE)
Market to Book Value (MTB)
Firm Age (AGE)
Ratio of foreign board members to total number of board members
Ratio of female board members to total number of board members
Total number of board members
A dummy variable that takes value of ‘1’ if the board chairman is also CEO of the same firm, and value of ‘0’ for otherwise
Ratio of total debt to total equity
Cash earnings per share, net of capital expenditures and total dividends
Return on assets
Logarithm of total assets
Market to book ratio of equity
Number of years since incorporation of the firm

This table defines the variables used in the empirical analysis.

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 N. Shehata
Table 2
Descriptive statistics, correlations and VIF.
Variables

Mean

SD

Max
Min

10

11

VIF
N

9
1. DIV 330 3.520 4.609 0.000 32.820 1
2. BFOR 351 7.287 17.241 0.000 90.909 .167*** 1 1.198
3. BFEM 351 9.257 10.506 0.000 50.000 .053 .085 1 1.254
3

4. BSIZE 351 9.524 2.981 4.000 17.000 .183*** .158*** .169*** 1 1.288
5. DUAL 351 0.382 0.487 0.000 1.000 − .100* .130** − .264*** .047 1 1.263
6. LEV 351 54.074 78.098 0.000 531.020 − .095* .128** .002 .034 .077 1 1.272
7. FCF 347 − 0.273 16.935 − 290.229 81.233 .071 − .006 .022 .043 -.094* .011 1 1.051
8. ROA 351 8.428 10.493 − 25.890 107.580 .236*** .046 .001 .073 − .087 − − − .071 .038 1 1.340
9. FSIZE 351 14.753 1.646 11.112 18.369 − .012 .333*** − .161*** .295*** .135** .345*** − − .070 .030 1 1.672
10. MTB 330 2.471 3.003 0.270 24.850 − − .027 .054 − .046 − .052 .011 .176*** − − .073 .145*** .010 1 1.235
11. AGE 351 28.299 22.849 0.000 106.000 .062 − − .137** .080 − .314*** − .264*** − .214*** .081 − .091* − .405*** .162*** 1 1.511

Variables are defined in Table 1. The asterisks ***, **, and * indicate significance at 1%, 5%, and 10%, respectively.

Finance Research Letters xxx (xxxx) xxx

N. Shehata Finance Research Letters xxx (xxxx) xxx

Table 3
Main results.
Models Model 1 Model 2 Model 3

Variables

BFOR 0.140** 0.174*** 0.122

(2.439) (3.091) (1.629)
BFEM − 0.012 − 0.024 − 0.026
(− 0.202) (− 0.421) (− 0.460)
REV 0.145*** 0.123**
(2.687) (2.105)
BFOR X REV 0.079
(1.052)
BSIZE 0.212*** 0.209*** 0.205***
(3.657) (3.587) (3.501)
DUAL − 0.062 − 0.064 − 0.065
(− 1.079) (− 1.117) (− 1.119)
LEV − 0.044 − 0.050 − 0.048
(− 0.757) (− 0.859) (− 0.821)
FCF 0.030 0.034 0.033
(0.559) (0.640) (0.634)
ROA 0.224*** 0.218*** 0.220***
(3.665) (3.663) (3.700)
FSIZE − 0.002 − 0.009 − 0.007
(− 0.033) (− 0.139) (− 0.109)
MTB 0.000 − 0.022 − 0.021
(− 0.001) (− 0.381) (− 0.376)
AGE 0.118* 0.117* 0.115*
(1.866) (1.848) (1.817)
Fixed Effects Industry, Year Industry Industry
Observations 326 326 326
R2 0.205 0.175 0.178

Variables are defined in Table 1. This table reports empirical results from estimating Eq. (1). DIV is the dependent variable in
the three models. Model (1) is the base model with year dummies. Model (2) uses REV as a dummy variable where post-
revolution years = 1, and pre-revolution years = 0. Model (3) uses an interaction term to check if the revolution affected
the relationship between BFOR and DIV.
The asterisks ***, **, and * indicate significance at 1%, 5%, and 10%, respectively.

board members to the MENA region since they have a positive influence on the internationalization decisions in emerging countries
(Filatotchev et al., 2007), and thus could help the MENA region attract more foreign direct investment (Sarhan and Ntim, 2018).
The paper is organized as follows: the next section provides an overview of the Egyptian context for the studied years. Section 3
discusses the methods used in the study. Section 4 reports the results while Section 5 provides additional analysis. Section 6 presents
the conclusion.

2. Context

Egypt is one of the largest countries of the Middle East and North African (MENA) region. The Egyptian Exchange (EGX) historical
grounds data back to 1883 (EGX, 2021). Two remarkable revolutions took place in Egypt during the past decade. The first one
out-broke on 25 January 2011 against President Mubarak’s regime that had been in place for thirty years where people were
disappointed from the social, economic and political environment. The second revolution occurred on 30 June 2013 opposing Pres­
ident Morsi’s regime where people found out that conditions had been worsened compared to the earlier regime. This has been fol­
lowed by having President El-Sisi ruling Egypt since then where the new regime worked on stabilizing the country after around three
years of severe economic and political unrest (Aboud and Diab, 2019).
Even though political and economic challenges continued to exist in 2014, it was called “The Egyptian Exchange Year”. EGX indices
boomed in 2014 where trading volume reached an unprecedented level in EGX history. Thus, EGX attained more international
recognition of its achievements. Foreign investors had more confidence in the Egyptian market, where huge foreign investments
occurred. Dividend yield reached an average of 7.0% for 2014 compared to 8.9% in 2011. Despite the instability of economic con­
ditions in the Egyptian market in 2011, the market was significantly growing compared to emerging markets and the MENA region
(EGX, 2011, 2014).

3. Methods

The initial sample includes companies listed on the Egyptian Exchange (EGX) index of the most active 50 companies ‘EGX50’ for a
10-years period (2005-2014). EGX used to publish governance data on EGX50, including, board data, for the period from 2005 to 2011
in a publication named the ‘Disclosure Book’. Since the ‘Disclosure Book’ was suspended after 2011, board data was then hand-

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Table 4
Robustness check.
Models Model 1 Model 2 Model 3

Variables

BFOR 0.100* 0.112** 0.084

(1.903) (2.169) (1.223)
BFEM − 0.021 − 0.034 − 0.035
(− 0.402) (− 0.634) (− 0.656)
REV 0.032 0.019
(0.637) (0.363)
BFOR X REV 0.043
(0.615)
BSIZE 0.105* 0.105* 0.103*
(1.964) (1.966) (1.914)
DUAL − 0.176*** − 0.179*** − 0.179***
(− 3.305) (− 3.368) (− 3.366)
LEV − 0.102* − 0.104* − 0.103*
(− 1.906) (− 1.955) (− 1.930)
FCF 0.036 0.048 0.048
(0.739) (0.999) (0.995)
ROA 0.336*** 0.321*** 0.322***
(5.991) (5.864) (5.877)
FSIZE 0.115* 0.114* 0.115*
(1.867) (1.869) (1.884)
MTB 0.128** 0.098* 0.098*
(2.335) (1.863) (1.864)
AGE 0.210*** 0.214*** 0.213***
(3.604) (3.688) (3.665)
Fixed Effects Industry, Year Industry Industry
Observations 326 326 326
R2 0.326 0.301 0.302

Variables are defined in Table 1. This table provides a robustness check by reporting empirical results from estimating Eq. (1)
where Dividends Payout is the dependent variable in the three models. Following the structure of Table 3, Model (1) is the base
model with year dummies. Model (2) uses REV as a dummy variable where post-revolution years = 1, and pre-revolution years =
0. Model (3) uses an interaction term to check if the revolution affected the relationship between BFOR and Dividends Payout.
The asterisks ***, **, and * indicate significance at 1%, 5%, and 10%, respectively.

collected for the following years (2012-2014) relying on publicly available sources; i.e., companies’ annual reports and websites. Data
on dividend yield (DIV), among all non-board control variables are extracted from Thomson Reuters database, was available for 330
companies. Accordingly, the final sample with complete data is 326 companies.
The dependent variable in this study is dividend yield (DIV), whereas the independent variable is the foreign board members
(BFOR). Board gender diversity (BFEM) is added as a control variable to the research model since the vast literature acknowledges the
relationship between board gender diversity and dividend payout as provided earlier. Moreover, several control variables1 are used
following the literature; including, board size (BSIZE), duality (DUAL), leverage (LEV), free cash flow (FCF), return on assets (ROA),
firm size (FSIZE), market to book value (MTB), and firm age (AGE). Table 1 provides an overview of the variables and their definitions
as commonly used in the literature.
To assess the relationship between BFOR and DIV, Model (1) is constructed as follows:
∑
DIV = β0 + βBFOR + βCONTROL + ε (1)

Where CONTROL represents the previously mentioned control variables.

4. Results

Descriptive statistics and correlations are provided in Table 2. The mean of BFOR is approximately 7%, with companies having no
foreign board members at all, up to a maximum of 91%. Table 2 also shows that there was no absolute value above 0.70, and the
variance inflation factors (VIF) was less than 10. Therefore, the threshold for multicollinearity does not seem to exist.
Model (1) in Table 3 shows the regression results of the ratio of foreign board members on dividend yield after controlling for year-
and industry-fixed effects, in addition to the control variables discussed earlier. The coefficient of BFOR is significantly positive
indicating that companies with foreign board members significantly pay to their shareholders more dividends, compared to their
counterparts. Egypt witnessed in 2011 the 25th of January Revolution which acts as a major exogenous shock that took place in Egypt’s
modern history. Accordingly, I add in Model (2) a dummy variable for the 2011 Egyptian Revolution (REV) where pre-revolution years

1
Board independence is not included in the study because it was firstly introduced in Egypt after the covered period.

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Table 5
Additional analysis.
Models Model 1 Model 2 Model 3

Variables

BFOR 0.294*** 0.310*** 0.390***

(3.750) (3.979) (3.604)
BFEM − 0.100 − 0.072 − 0.072
(− 1.235) (− 0.908) (− 0.907)
REV 0.101 0.132
(1.353) (1.648)
BFOR X REV − 0.116
(− 1.066)
BSIZE 0.302*** 0.298*** 0.309***
(3.788) (3.735) (3.848)
DUAL − 0.133* − 0.124 − 0.122
(− 1.720) (− 1.606) (− 1.576)
LEV − 0.051 − 0.067 − 0.077
(− 0.662) (− 0.879) (− 1.010)
FCF − 0.057 − 0.063 − 0.063
(− 0.802) (− 0.897) (− 0.894)
ROA 0.240*** 0.193** 0.195**
(3.012) (2.549) (2.577)
FSIZE − 0.083 − 0.076 − 0.087
(− 0.954) (− 0.863) (− 0.986)
MTB 0.039 0.053 0.049
(0.480) (0.702) (0.645)
AGE 0.092 0.082 0.090
(1.077) (0.958) (1.050)
Fixed Effects Industry, Year Industry Industry
Observations 179 179 179
R2 0.274 0.236 0.241

Variables are defined in Table 1. This table reports empirical results from estimating Eq. (2). DIV is the dependent variable in
the three models while BFOR and control variables are lagged by one year. Model (1) is the base model with year dummies.
Model (2) uses REV as a dummy variable where post-revolution years = 1, and pre-revolution years = 0. Model (3) uses an
interaction term to check if the revolution affected the relationship between BFOR and DIV.
The asterisks ***, **, and * indicate significance at 1%, 5%, and 10%, respectively.

(2005-2011) take the value of ‘0’ and post-revolution years take ‘1’ instead of having year-fixed effects as in Model (1). The purpose of
Model (2) is to assess the relationship between REV and DIV since it is a major event that occurred in Egypt and is expected to have an
impact on firms’ behavior. The result provided reveals that the revolution has a significant positive impact on dividend policies in
Egypt. This could be due to the uncertainty and instability that existed in the economic and political environment afterwards, which
might have led companies to pay more dividends to their shareholders as a sort of compensation. Foreign board members still hold to
having a significant association with dividend policies in Model (2). However, when the interaction effect of BFOR and REV (BFOR X
REV) is added in Model (3), no significant relationship could be traced between BFOR X REV. In other words, the revolution in itself did
not affect the association between the behavior of foreign board members and dividend payments.
Robustness check is provided in Table 4 by using dividend payout ratio instead of dividend yield. Results confirm the significant
positive impact that foreign board members have on dividend policies as shown in Models (1) and (2). However, the revolution does
not seem to have any impact on dividend strategy.
These findings could be explained using the agency theory and the stakeholder theory as provided earlier. The presence of foreign
board members might have lessened the agency problems through increased board monitoring and thus led to better dividend pay­
ments. The positive relationship between the representation of foreign members and dividend payment could also be perceived as a
means of protecting stakeholder’s interests, and thus following the stakeholder theory. Moreover, results suggest that the revolution
was associated with increased dividend payments which might be interpreted in two ways. On one hand, foreign board members were
in favor of paying more dividends after the revolution compared to the pre-revolution period so that this might act as a means of
protecting the shareholders’ interest in the firms and guaranteeing, to some extent, continuity of their investments. On the other hand,
the same behavior might be alarming since it drained firms’ capital in a time of uncertainty and instability in the market.

5. Additional analysis

To control the endogenous problem and synchronization effect, I reconstructed Model (1) by lagging BFOR and the control vari­
ables, and thus Model (2) is constructed as follows:
∑
DIVt = β0 + βBFORt− 1 + βCONTROLt− 1 + ε (2)

Where DIVt denotes dividend yield in year t while BFORt-1 and CONTROL t-1 represent presence of foreign board members and the

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Table 6
Additional robustness check.
Models Model 1 Model 2 Model 3

Variables

BFOR 0.182** 0.196** 0.177

(2.279) (2.473) (1.600)
BFEM 0.059 0.032 0.032
(0.708) (0.399) (0.398)
REV − 0.049 − 0.056
(− 0.641) (− 0.686)
BFOR X REV 0.028
(0.250)
BSIZE 0.039 0.042 0.039
(0.481) (0.516) (0.476)
DUAL − 0.105 − 0.113 − 0.114
(− 1.336) (− 1.441) (− 1.443)
LEV − 0.106 − 0.106 − 0.104
(− 1.348) − 1.369) (− 1.322)
FCF 0.010 0.028 0.028
(0.139) 0.391) (0.389)
ROA 0.158* 0.147* 0.146*
(1.954) (1.898) (1.885)
FSIZE 0.101 0.095 0.098
(1.134) (1.064) (1.084)
MTB 0.150* 0.095 0.096
(1.794) (1.226) (1.234)
AGE 0.214** 0.224** 0.222**
(2.443) (2.571) (2.531)
Fixed Effects Industry, Year Industry Industry
Observations 179 179 179
R2 0.247 0.205 0.206

Variables are defined in Table 1. This table provides an additional test by reporting empirical results from estimating Eq. (2)
where Dividends Payout is the dependent variable in the three models while BFOR and control variables are lagged by one
year. Following the structure of Table 3, Model (1) is the base model with year dummies. Model (2) uses REV as a dummy
variable where post-revolution years = 1, and pre-revolution years = 0. Model (3) uses an interaction term to check if the
revolution affected the relationship between BFOR and Dividends Payout.
The asterisks ***, **, and * indicate significance at 1%, 5%, and 10%, respectively.

previously mentioned control variables in year t-1.

Following the analysis provided in the earlier section; Model (1) in Table 5 provides the main model, Model (2) reflects on the
revolution’s impact on dividend yield, while Model (3) adds the interaction effect of BFOR and REV. The significant positive rela­
tionship between the presence of foreign board members and dividend policies is confirmed in the three models.
Following the main results, additional analysis was conducted for robustness where dividend payout replaces dividend yield in
Model (2) as shown in Table 6.

6. Conclusion

Motivated by the relationship between board gender diversity and dividend that has been extensively examined throughout the
literature, this study examines the effect of foreign board representation on dividend yield in Egyptian top listed companies. Given that
several types of analyses have been conducted; it is less likely that the results are an artifact of the changes in the sample size. Even
though this is a single country study with a unique context regarding the examined period, generalizability of the results could be
extended not only to countries in the MENA region which witnessed a similar context, but also to other countries that face instability in
their market and economic conditions. My results emphasize the importance of national diversity on boards where it has a significant
impact on dividend policies. Since there is a dearth of research assessing the impact of board national diversity, future research studies
could assess their impact on the behavior of firms considering several aspects such as firm disclosure level, firm performance and firm’s
cost of capital. Moreover, future research could also examine the influence of diverse nationalities on board in addition to having the
foreign board members’ variable representing all foreigners grouped together. It is important to note that in the current study, board
gender diversity does not seem to impact dividend behavior. This result draws the attention of policymakers that board diversity in
general should be carefully considered.

Author Statement

This paper was developed solely by the author, Nermeen Shehata.

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Funding

This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

Declaration of Competing Interest

None.

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