The bond market of various GCC states is only beginning to establish. This market functions within financial structures which are considerably contingent on banks. Meanwhile, non-bank financial organizations are scarcely represented in the countries in question (Al-Hadi et al., 2017; Ayadi & De Groen, 2013; Chowdhury & Maung, 2013; Obay, 2018; Yahyaee, 2006; Zeitun & Saleh, 2015). The development of banking divisions in GCC states was partially hindered by supervision and harsh control.
Thus, banks functioning in these countries are confined in their ventures because they are expected to adhere to higher capital prerequisites. Besides, banking divisions are frequently overshadowed by government-owned banks, which leads to the lack of a deposit insurance system and the restricted opportunity for penetration of external banks (Ayadi & De Groen, 2013).
The median rate of government-owned banks in the world in 18% from all banking structure resources (Cull et al., 2018). However, in GCC states, the same rate reaches as much as 66% (Table 3). Over many years, researchers and financial analysts have been emphasizing the contribution of state ownership to corporate disorganization. It has been noted that such a type of governance is irrelevant due to its ambitions to combine economic gains with financial and private ones, including public support, surplus employment, and profits gained by means of insider expropriation (Shleifer & Vishny, 1994, 1998).
State-owned organizations sometimes engage in insecure projects in order to gain a competitive advantage, which is expected to lead to the establishment of a beneficial connection between corporate measures and state control.
Research by Farag and Mallin (2016) offers empirical evidence to justify these opinions. Furthermore, Zhu and Yang (2016) note that state-controlled companies may have connections with untrustworthy endeavors induced by a probable moral danger caused by manager–owner misunderstandings or budget limitations. Borisova et al. (2015) remark that such issues can provoke a high cost of debt. Scholars also consider that boards of directors which function in the conditions of developing economies suffer from insufficient institutional support. As a result, emerging banking companies have a low possibility of performing a significant function of control and supervision (Peng, 2004).
As Okhmatovskiy (2010) argues, when board includes some representatives from the government, a connection may develop between the company and state-owned organizations. This affiliation may be related to some costs since the government owns some data about the company and thus can affect the resolutions that the board makes. Furthermore, intense political involvement may limit a firm’s autonomy.
As a matter of fact, many specialists consider control by the state as the cause of disorganization. Economists mention that in an attempt to follow its socio-economic and political aims, the government is likely to redirect companies’ resources (Shleifer & Vishny, 1998). Additionally, governmental regulation of organizations is connected with the insufficient monitoring and incentives that might encourage the increase in managers’ performance (Aharoni, 2000, p. 63).
Some research articles indicate that companies whose owners are engaged in politics tend to be involved in illegal activities and make inadequate investments. Such actions can depreciate the organization’s value and lead to adverse effects on minority shareholders (Chen et al., 2017; Liao et al., 2009; Wang, 2015).
Earlier studies investigated the influence of political engagement on the cost of debt. Bliss and Gul (2012) acknowledged that politically-related firms were compelled to meet high interest rates because of incompetent contracting associated with increased innate risk. At the same time, some scholars report a reduced cost of debt in politically related companies of Hong Kong. Bliss et al. (2018) note that bankers charge decreased interest rates to such firms.