S. market as well. When one views this chart, it is no wonder that speculators are divided about the reactions of Saudi Investors. This was a devastating crash for many and it will undoubtedly have a dramatic effect on their decisions in the future. The real question is whether this indicates a reason for caution in the future, or whether it represents a good time to get some good deals. There are many factors that the Saudis cannot control, but that have a dramatic effect on their economy and well-being. They depend on consumer demand and are limited by the amount of money that the consumer is willing to pay for their products. They are particularly sensitive to shocks in the American economy, particularly those that cause the American consumer to become thrifty and conservative in their fuel usage. When American demand falls, the Saudis must react in order to prevent a shock in their economy as well (Lippman, 2004). They can choose to raise price, which is likely to cause an even further drop, depending on elasticity. However, they may have to cut production in order to reduce expenditures until the demand once again picks up. They are at the mercy of their customers due to their dependence on a single commodity.

Saudi Arabia is not the only oil producing entity and the issue of oil demand and price affects many Middle Eastern Nations (Hammoudeh and Al-Gudjea, 2003).

The following represents a comparison of the Saudi Arabian stock markets to those of other Middle Eastern nations.

Source: Williams, 2006.

This chart places the Saudi Arabian situation in perspective. The Tadawul is not the only Middle Eastern market to experience volatility. It appears that other countries are experiencing similar trends. However, as this chart demonstrated the drop experienced by Saudi Arabia was much steeper than the downward trends of other markets. The Saudi market fell harder and at a faster rate than its cohorts.

In order to reduce the effects of demand and price shocks, the oil producing nations decided to organize and form an entity to help manipulate prices by limiting production of its members. The organization is the Organization of the Petroleum Exporting Countries (OPEC). OPEC's stated mission is to coordinate & unify the petroleum policies of Member Countries & ensure the stabilization of oil prices in order to secure an efficient, economic & regular supply of petroleum to consumers, a steady income to producers & a fair return on capital to those investing in the petroleum industry" (OPEC, 2007).

As one can see, OPEC's sole mission is to help alleviate some of the risks associated with dependence on a single commodity market. By the strictest definition, OPEC represents a cartel. The oil producing nations realized that fair competition could have devastating effects in the region due to price gouging and the resultant warfare. The cartel was formed to preserve peace and stability in the region.

No one is allowed to conduct independent verification of Saudi oil reserves, so no one actually knows if there is a true correlation between the stock market and Saudi oil production levels. OPEC places limits on the production allowed by member countries in order to help preserve the balance of power and stabilize price. The actions of OPEC have a significant impact on stock prices and volume on the Tadawul.

The Saudi government realizes the risks associated with their position regarding oil prices and their inability to control external forces. To help alleviate this risk they have taken several recent steps to try to diversify their product mix and to boost the economy. In December of 2005 work began on a new city, which is to be called King Abdullah Economic City. This city promises to have vast districts for petrochemical, pharmaceutical products, tourism, finance, education and research (Emaar Properties, 2007). Saudi Arabia became a World Trade Organization member in 2005 (WTO, 2007). These moves will allow the Saudi Arabian government to diversify and enter into expanded markets for products other than oil. This is an important move regarding the future of the Tadawul as it will have a drastic effect on the confidence and ability to Saudis to invest.

The Saudi Stock Exchange (SSE) was established in the 1970s when ownership of Saudi Arabia's foreign-owned banks was transferred to Saudi nationals. This forced investors to partner with nationals in order to be permitted to remain in Saudi Arabia as a business entity. The stock market was informal and operated with any discernable regulatory framework (SAGIA, 2005). The corporations themselves...

In 1984 regulation of the market was delegated to the Ministry of Finance, the Ministry of Commerce, and SAMA (SAGIA, 2005). These agencies regulated the process for new company listings and determined the market policies and procedures. Under this system, only commercial banks could act as brokers. Settling took place at a central regulation facility called the Saudi Share Regulation Company (SSRC). In 1989, the Electronic Securities Information System (ESIS) was established. This was an automated clearing and settlement system (SAGIA, 2005). This system resulted in greater efficiency than the old paper-driven system.
In 2001, the ESIS system was replaced by Tadawul, a new clearing and settlement service (SAGIA, 2005). These regulatory systems and settlement systems resulted in increased market growth. Since then almost 10% of nationals have invested in joint ventures (SAGIA, 2005). However, these numbers can be deceiving. The number of publicly listed stocks on the Saudi market is in excess of 200. However, only 13 new businesses were admitted in the past decade. Only 20 of Saudi's industrial enterprises are listed on the exchange, despite the fact that there are 1000s of potential companies that could be listed. Only 27% of these stocks are "free for trading" (SAGIA, 2005). The government and large corporate entities own the remainder.

Until 1997, only Saudi nationals could participate in the market. In 1997 participation in the Saudi market was opened to foreign investors (SAGIA, 2005). However, foreign investors are restricted to investing in only certain mutual funds. Presently, the number and types of securities offered is growing and the market is becoming more attractive and accessible to both foreigners and nationals alike. In addition to an expanding stock market the ability to purchase bonds, treasury bills, and floating rate notes is increasing as well (SAGIA, 2005). Foreigners can now invest in government securities.

The Saudi stock market is dominated by an imbalance of power among investors. Private investors are minimal, compared to large corporate and government investors. This can be viewed as both a risk a benefit depending on perspective. A small percentage of companies control a majority of the shares. The stability of these firms will be a key factor in the ability of the Tadawul to recover after the February 2006 shocks. If the companies are stable, then the economy will be stable. If they experience instability themselves, then the stock market will reflect this instability as well. Individual investors will have a minimal effect on the market due to their small percentages of shares owned. However, this is not to say that they will not have an impact at all, it only means that a planned effort by larger corporate investors could help to offset the actions of smaller investors. All of this is, of course, closely tied to oil price movement (Williams, 2006). Understanding these relationships is key to understanding the factors that influence stock prices and is essential to the exploration of the research hypotheses in this study. Now let us examine the key issues in this study.

Hypothesis and Research Questions

As we have seen, movements in the Saudi Stock market have been a wild ride, especially in the past year. In order to devise a strategy for helping to stabilize the stock market in the future it is important to understand the mechanisms that drove the rapid rise and then decline. The research will focus on the following hypotheses.

H1: The fall in Stock prices will have a negative impact on the ability of the market to recover in the future due to decreased investor confidence. The null hypothesis will state that investor confidence has not been impacted by the recent shock and that it will have no effect on future investments.

H2: The fall in stock prices has had a measurable negative economic impact on investors making it difficult to invest in the near future. The null hypothesis will state that the economic impact will be perceived to be negligible on the investor and will have little impact on their ability to reinvest in the Tadawul.

These research hypotheses explore two factors that are important in stock market recovery, willingness and ability to invest. These factors will become much more important as the Saudi economy moves towards greater levels of privatization. It is important to understand the impact that the recent bubble burst has on the average investor. Whether they decide to err on the side…