The Impact of Corporate Governance Mechanisms on Firm's Financial Performance: Evidence from Commercial Banks in Ethiopia
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2012-06
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Abstract
Corporate governance has become an issue of global significance and has received new
urgency due to various corporate scandals and failure. This paper investigates the impact
of corporate governance mechanisms on firms' financial performance using five years
data from the year 2007 to 2011 with a sample of eight Ethiopian commercial banks.
Three financial performance indicators such as return on asset, return on equity and net
interest margin were used. Corporate governance mechanisms considered in this study
include board size, board gender diversity, board members educational qualification,
board members business management and industry specific experience, and audit
committee size. The study controls the effect of size, leverage and growth of banks. The
regression results show that large size board and audit committee negatively influences
financial performance; whereas board members educational qualification positively
associated with financial performance. While industry specific experience of director
positively related with return on asset but it has a negative effect on net interest margin.
Finally, the percentage of female directors and board members business management
experience does not have a significant effect. In general, the findings suggest that banks
with effective corporate governance mechanisms improve financial performance
depending on the measure used although not all corporate governance mechanisms are
significant.
Keywords: Corporate Governance Mechanisms, Agency Theory, Financial Performance
Commercial Banks and Ethiopia.
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Commercial Banks, Governance Mechanisms