Impact of Corporate Governance on Bank’s Financial Performance

Abstract

The objective of this study is to investigate empirically the impact of corporate governance on banks’ financial performance in Ethiopia using panel data over the period 2005-2021. Since the data is secondary in nature, the quantitative approach to research was used to measure the impact of corporate governance mechanisms on banks’ financial performance which is measured by ROA. As well, the Feasible Generalized Least Square (FGLS) estimation was used. The FGLS is preferred to the pooled OLS, fixed effect, and random effect model based on the joint effect of an entity in the pooled, variation across entities has not random and correlated in the random effect model, and heteroscedasticity and serial correlation problem in the fixed effect model. The overall FGLS regression result reveals that the model is significant at a 1% level. The regression analysis that six explanatory variables have been found significant effect on the financial performance of bank firms in Ethiopia, management efficiency and asset quality had a negative significant impact on bank performance, whereas bank size, liquidity ratio, legal reserve, and loan to deposit ratio were positively and significantly affect bank performance.

Keywords: Commercial Banks, corporate governance, financial performance, panel data, Return on Assets, Ethiopia.

DOI: 10.7176/RJFA/14-1-01

Publication date: January 31^st 2023