The Effect of Corporate Governance on Financial Performance: The Case of Ethiopian Private Commercial Banks and insurances
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Date
2024-05-14
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A.A.U
Abstract
This study investigates the effect of corporate governance on the financial performance of
Ethiopian private commercial banks and insurance companies. Specifically, the study
examines how board size, board gender diversity, board member educational qualifications,
audit committee size, institutional ownership, and board meeting frequency influence
performance, measured by Return on Assets (ROA) and Return on Equity (ROE). The
sample consists of 29 private commercial banks and insurance companies purposively,
which is 16 were private commercial banks and 13 were private insurances, utilizing
balanced panel data from 2019 to 2023 Collected from the bank and insurance companies'
audited accounting records and questioners for board secretaries. Descriptive and
inferential statistics, including the multiple linear regression approach of the Ordinary
Least Square (OLS) model, were employed for analysis. The Random Effect model was
selected based on the Hausman test results. Key findings of the regression result indicate
that larger board sizes negatively impact financial performance, while gender diversity,
higher educational qualifications among board members and Institutional ownership
positively related with financial performance. Regular board meetings contribute to better
financial performance, but the board size and institutional ownership have insignificant
effect on ROE. Although the size of audit committees does not significantly influence on
banks and insurances financial performance As a result, the study comes to the conclusion
that the financial performance of insurance and bank businesses is not significantly
impacted by some corporate governance measures. The conclusions emphasize the
importance of optimizing board composition, enhancing gender diversity, and encouraging
institutional investment to bolster financial performance in the banking and insurance
sectors in Ethiopia. The recommendation include streamlining board sizes, promoting
gender diversity, prioritizing board members' educational qualifications, improving audit
committee effectiveness, attracting institutional investors, and ensuring regular and
strategic board meetings is important for financial performance of banks and insurances.