The effect of corporate governance mechanisms on commercial banks financial performance in Ethiopia

Abstract

Now a day’s issue of corporate governance is becoming the popular agenda and getting attentions of our world as a general due to essentiality of corporate governance structure on firm’s financial performance. The essence in corporate governance mechanisms is to vigorously demise agency costs in order to ensure that firm’s capital is allocated and deployed only on profitable activities. It plays a key role in deterrence of agency problems which would be created between managers and shareholders. The work of scholars confirms that, firms with pertinent corporate governance structure are firm with appreciative financial performance than firms with flaw corporate governance. To reach on an authentic finding from the study, we used return on asset, return on equity and operating profit margin as dependent variables; board size, board independence, frequency of board meetings, audit committee and board ownership as independent, and financial leverage and firm growth rate were used as control variables. The researchers used both correlation analysis and pooled panel time series data with cross-sectional nature. The econometric regression result shows that, board size is negatively and significantly associated to all the three indicators of financial performance: return on asset return on equity and operating profit margin. Both Board independence and Board ownership have positive relationships and significant effects on the three indicators of commercial banks financial performance. The result shows that Audit committee negatively and significantly correlated to return on asset and return on equity with negative and insignificant impact on operating profit margin. Frequency of board meeting remains positive in terms of its direction of connection and immaterial in its affiliation with the three financial performance indicators of commercial banks under investigation.