The Impact of Corporate Governance Practices on Corporate Financial Performance in Ethiopia

Biruk Ayalew Wondem,Gurdip Singh Batra

doi:10.35248/2472-114x.19.7.196

Abstract

This research was carried out to examine the impact of corporate governance practices on share companies’ financial performance by using panel regression approach. Data sources from 24 share companies for five years. The findings of robust FGLS estimation of panel regression using ROA and ROE as measures of financial performance revealed board of directors’ gender diversity (BDGD sig. at 5%) and size of share companies (SIZE sig. at1%) have a positive association with return on assets and board of directors meeting attendance rate (BDMAR) in person has a positive association but not significant. The board of directors’ size (BS sig. at 5%), board of directors meeting frequency (BMF sig. at 5%) and board of directors’ leadership practice (BDLPR sig. at 1%) have a negative impact on return on assets. The paper also empirical findings ROE has a significant and positive association with board meeting frequency (p<0.05); board of directors’ gender diversity (p<0.05) and size of share company (p<0.01). And board of directors meeting attendance rate in person has a significant and negative relationship with ROE (p<0.01). However, no significant but negative association was found between ROE with board size and board of directors’ leadership practice. State ownership has also a positive association with ROA as well as ROE. The model is good fit with R-square value of 84 and 93% for model one (ROA) and two (ROE) respectively. The study concluded that corporate governance practices of Ethiopian share companies are not going on the way what it should be in line with the changing landscape of corporate business environment for the reason that boards of directors elected and working in companies lack true independence and the required skills and knowledge. Awareness gap as to corporate governance; mal-governance practice in recruitment and selection, lack of up to date regulatory framework; absence of specific policy framework, national principles and codes results unstructured governance practices to be practiced. All these cause the problem of ethics, disclosure and transparency, corruption, nepotism, tribalism etc. and this research can be extended further by incorporating variables that can show the external corporate governance practices and other sectors.

Highlights

Good corporate governance practice is a gauge how companies are directed and controlled become a key topic and received wide attention both in practice [1,2,3] and in academic research [4,5,6]
Where i=1, 2...n is the share company index, t=1, 2...T is the time index, SHACOPERFit=share company i performance at time t as expressed and measured by return on asset (ROA) and return on equity (ROE), β0=Intercept, BSit=Board size of share company i at time t, BMFit=Board of directors meeting frequency of share company i at time t per annual, BDMARit=Board of directors meeting attendance rate in person of share company i at time t, BDGDit=Board of directors’ gender diversity of share company i at time t, BDLPRit =Board of directors’ leadership practice for share company i at time t, SIZEit=Size of share company i at time t, Ɛit =The error term for share company i at time t
ROA has negative significant relationship with board size; positive significant relationship with board of directors meeting attendance rate and size of share company at p-value less than 1% in all cases

Summary

Introduction

Good corporate governance practice is a gauge how companies are directed and controlled become a key topic and received wide attention both in practice [1,2,3] and in academic research [4,5,6]. CG practices of Ethiopian share companies are not going on the way what it should be a changing landscape of corporate business environment in the country where the activities of corporate business operations today are like those developed nations but not in governance practice. The issue of corporate governance practices on firm financial performance has been exhaustively studied for decades’ especially in developed countries and yet ambiguity and incongruence continue to prevail [8]. The study crafted to examine the impacts of corporate governance practices on share companies’ financial performance in Ethiopian where companies operating their business in the absence of organized stock market, up to date regulatory framework and corporate governance systems that can induce good corporate governance and performance. The study intends to contribute to the corporate governance literature in under developed countries context where

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Discussion

Conclusion