Corporate Governance and Financial Performance of Commercial Banks in Ethiopia
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Date
2017-06
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Addis Ababa University
Abstract
Corporate governance is an old age concept which provides for a set of transparent relationships
between an institution’s management, its board, shareholders and other stakeholders. This paper
investigates the impact of corporate governance mechanisms on firms' financial performance
using five years data from the year 2012 to 2016 with total population of the study consists of 19
banks operating in Ethiopia and using purposive sampling technique and select a sample of fifteen
Ethiopian commercial banks. Return on asset was used as the financial performance indicator.
Corporate governance mechanisms considered in this study include board size, frequency of
board meeting, board gender diversity, availability of separate risk management committee in
the board, and level of corporate governance disclosure. The study controls the effect of bank size
and financial leverage. The Pearson Correlation and the regression analysis were used to find
out whether there is a relationship between the corporate governance variables and firms
performance. In examining the level of corporate governance disclosures of the sampled banks,
content analysis was applied to determine the level of disclosure using un-weighted checklist and
a disclosure index was developed by adapted from (Ranti U. O., 2011) which is guided by
UNCTAD- ISAR (United Nations Conference on Trade and Development/International Standards
of Accounting and Reporting) benchmark of corporate governance disclosure items, the NBE
code and OECD code of corporate governance. The study therefore observed that a negative
relationship exists between board gender diversity and availability of separate risk management
committee and the financial performance of these banks, while a positive relationship was also
noticed between frequency of board meeting and performance. Finally, the board size and level
of corporate governance disclosure does not have a statistically significant effect. The study
suggests that importance of increasing board meetings. Also, steps should be taken to encourage
commercial banks to disclose corporate governance information.
Keywords: Corporate Governance Mechanisms, Disclosure Index, Financial Performance,
Commercial Banks and Ethiopia
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Keywords
Corporate Governance Mechanisms, Disclosure Index, Financial Performance, Commercial Banks and Ethiopia