The Impact of State Ownership and Regulation on Internal Control Weaknesses: The Case of Algerian Banks

This article examines the effect of state ownership and regulatory frameworks on internal control weaknesses (ICW) within an emerging economy. Focusing on the Algerian banking sector, we exploit a symmetric pre- and post-regulatory window (2007–2016) surrounding the enactment of Regulation 11-08. Using an asymmetric Gompit panel model on data of 19 Algerian banks, we analyze the interplay between corporate governance mechanisms and regulatory pressures. The empirical results reveal that while state ownership does not significantly affect the prevalence of ICW, the introduction of Regulation 11-08 led to a significant reduction in the weakness. These findings suggest a “substitution effect,” wherein rigorous legal frameworks compensate for the external corporate governance impact, thereby neutralizing the specific impact of ownership structure. This paper provides historically grounded evidence on the efficacy of regulatory reforms, offering valuable insights for policymakers in emerging markets seeking to enhance institutional compliance.