Corporate Governance Mechanisms and Financial Performance in Ethiopian Insurance Industry
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Date
2016-12
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Addis Ababa University
Abstract
Good corporate governance is an important pillar of the market economy and it enhances investor
confidence. A strong and balanced board of directors is necessary as a supervising body for the executive
management of a company with dispersed ownership and it has received new urgency due to various
corporate scandals and failure. This study seeks to see impacts of corporate governance
mechanism on financial performance of Insurers in Ethiopia. To address the research
hypotheses needs and achieve the broad research objective, a quantitative research approach
and explanatory research design were adopted in carrying out this research. The variables were
chosen based on findings from both empirical and theoretical literature. Secondary data of seven
insurers from 2006 to 2015 with a total of 70 observations were collected using purposive
sampling technique. The study employed panel data estimation techniques and the researcher
has adopted fixed effects regression technique instead of random effect models, in the case of
cross section-fixed effects, the p-value is insignificant and only period fixed effects is allowed to
analyse. The study analyses a range of internal corporate governance variables board size, chief
executive’s compensation, board member educational qualification, female directors in the
board, frequency of board meeting, board member other business managements experience,
board member’s industry specific experience and the study also controls the effect of premium
growth of Insurers. The regression results show that, board size, chief executive’s compensation,
board member educational qualification, female directors in the board, frequency of board
meeting, and board member other business managements experience, had a significant effect on
the financial performance in Ethiopian insurance sector. Other variables including board
member’s industry specific experience and premium growth have statistically insignificant
impact on financial performance (ROA) of insurance companies in Ethiopia. So, stakeholders
should give consideration to board size, chief executive’s compensation, board member
educational qualification, female directors in the board, frequency of board meeting, and board
member other business managements experience when they set governance policy for industry as
general and for the company specifically.
Keyword: Corporate Governance mechanism; agency theory, Insurers, financial performance
and Ethiopia.
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Keywords
Corporate Governance mechanism, agency theory, Insurers, financial performanceand Ethiopia