Does the Corporate Governance Practice Support the Corporate Financial Performance of Banking Industries in Ethiopia? Panel Data Analysis

Abstract

The high-profile corporate collapses and failures in early 2000s changed the image of accounting, auditing, and regulatory environments. As a result, the need for implementing effective corporate governance practice (CGP) in corporate financial institutions has gained significant attention worldwide. Effective CGP paves the way for access to finance, lower cost of capital, better corporate financial performance (CFP), and favourable treatment by all stakeholders. This study examines the relationship between corporate governance variables and financial performance in the Ethiopian banking industry. The board size, independence, educational level of board and audit committee characteristics were employed as measures of corporate and return on assets (ROA) and return on equity (ROE) as financial performance metrics. The study involves a census of all major financial institutions supervised by the National Bank of Ethiopia (NBE) for six years, 2015-2020. The main finding of this study revealed that the existence of board independence, the presence of an audit committee, the financial leverage ratio and financial institution size have a positive significant influence on CFP. Therefore, this study offers an important implication for developing corporate governance and capital structure to support underdeveloped financial institutions. This makes a significant contribution to the existing literature by addressing the specific context of Ethiopian banking industries, filling a gap in knowledge regarding the relationship between corporate governance and financial performance in this sector.

Keywords: Corporate governance practice, Ethiopian banks, Board characteristics, and corporate financial performance.

JEL Code: C33, G01, G21, and G30