The effect of corporate governance on firms financial performance: evidence from selected banks in Ethiopia

Abstract

Corporate governance is the most recent and youngest discipline and philosophy in global business environment. That is why currently firms in developed and developing countries are jointly incorporated corporate governance in their curriculum. Corporate governance has several development principles which made it to be highly entertained in business environment and to be taken as principal development agenda in business world. In financial industry corporate governance mechanisms have especially attention in contributing towards the protection of agency problems or costs. The ultimate objective in fighting toward agency cost is curbing wastage of resources and avoiding investment of shareholders' funds on unprofitable activities. The works of different scholars mentioned on varieties of literatures revealed that, firms governed and structured according to corporate governance mechanisms have better performance record than firms with no corporate governance mechanisms which are performing poor. Basically, this finding is not to mean that it remain the same for all researchers' findings in their work on the same discipline of study, because works of different scholars oppose this finding as they have found mixed results on the relationships between different variables of corporate governance and financial performance. This study has been tried to examine the effect of corporate governance mechanisms on firms' financial performance on the selected commercial banks in Ethiopia by identifying some selected determinant variables which are believed to consist direct relationship with performance of financial industry in Ethiopia, typically on selected commercial banks through reviewing of financial performance recorded. Dependent variables used to show financial performance are return on asset, return on equity and operating profit margin. Furthermore, two control variables, firm size and financial leverage were used. For the analysis of raw data, both correlation analysis and pooled panel data regression models of cross-sectional and time series data for analysis. Key words: Corporate Governance Mechanisms, Agency Problem, Firms' Financial Performance and Commercial Banks.