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

Biruk Ayalew Wondem and Gurdip Singh Batra

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.