Corporate Governance Mechanisms and Firm Performance: The Case of Ethiopian Insurance Industry

Asamnew Techan Demeke

doi:doi:10.11648/j.jim.20160502.11

| Peer-Reviewed

Corporate Governance Mechanisms and Firm Performance: The Case of Ethiopian Insurance Industry

Asamnew Techan Demeke

Published in Journal of Investment and Management (Volume 5, Issue 2)

Received: 2 October 2015 Accepted: 20 October 2015 Published: 21 July 2016

Views: Downloads:

Download PDF

Share This Article

Twitter
Linked In
Facebook

Abstract

In this study the effects of board characteristics (specifically proportion of outsiders in the board, board size, CEO-Chairman duality, and board meeting frequency), debt policy, and dividend policy are investigated in the Ethiopian context using two theories of corporate governance, which are agency theory and stewardship theory. Financial performance is measured using return on assets and return on equity. The study used panel data and Pooled OLS regression to analyze the relationship between corporate governance mechanisms and firm performance using a data set of 8 insurance companies of Ethiopia over the period 2008-2012. The results show that proportion of outside directors, board size, debt ratio, and ownership have a significant negative effect on performance of insurance companies. However, boards meeting frequency, firm size and firm age, are identified to have a significant positive impact on firm performance. Dividend policy have no effect on firm performance while the effect of CEO-Chairman Duality remains untested since it is not practiced in any one of the insurance companies.

Published in	Journal of Investment and Management (Volume 5, Issue 2)
DOI	10.11648/j.jim.20160502.11
Page(s)	6-16
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2016. Published by Science Publishing Group

Keywords

Board Characteristics, Corporate Governance, Financial Policies, Firm Performance, Ethiopia

References

[1]	The Institute of Chartered Accountants of Pakistan (2006). Instituting Corporate Governance in Developing, Emerging and Transitional Economies.
[2]	Muth M. M. and Donaldson L. (1998). Stewardship Theory and Board Structure: a Contingency Approach. Scholarly Research and Theory Papers, 6 (1), 5-28.
[3]	Jensen, M. C. and Meckling, W. (1976). Theory of the firm: managerial behavior, agency costs, and ownership structure, Journal of Financial Economics, 4, 305-60.
[4]	Belkhir M. (2009). Board of directors’ size and performance in the banking industry. International Journal of Managerial Finance 5, 201–221.
[5]	Fekadu, Petros G. (2010). Control in Ethiopian Share Companies: Legal and Policy Implications. Mizan Law Review 4 (1), 1-30.
[6]	Florackis C and Okan A (2004). Agency cost and Corporate Governance Mechanism: Evidence for UK Firms, Working Paper, University of York, UK.
[7]	Easterbrook F. (1984). Two agency cost explanation of dividends. American Economic Review 74, 650-659.
[8]	Jr., Gerard C. and Levine R. (2002). Corporate Governance in Finance: Concepts and International Observations. Conference paper.
[9]	TIAN, J. J. and LAU, CHUNG-MING (2001). Board Composition, Leadership Structure and Performance in Chinese Shareholding Companies. Asia Pacific Journal of Management, 18, 245–263.
[10]	Siladi B. (2006). Corporate Governance: An Evaluation. Un-published.
[11]	Hermalin, B. E., and Weisbach, M. S. (2000). Board of Directors as an Endogenously Determined Institution: A Survey of the Literature. University of California at Berkeley and University of Illinois Working Paper.
[12]	Agrawal and C. Knoeber (1996). Firm Performance and Mechanisms to control Agency Problems between Managers and Shareholders. Journal of Financial and Quantitative Analysis 31 (3), 377-397.
[13]	Kang H., Cheng M. and Gray S. J. (2007). Corporate Governance and Board Composition: diversity and independence of Australian boards. Corporate Governance, 15 (2), 194-207.
[14]	Shivadasani, A., and David Yermark (1999). CEO involvement in the selection of new board members: An Empirical Analysis. Journal of Finance 54, 1829-1853.
[15]	Kiel G. C. and Nicholson G. J. (2003). Boards that Work: A New Guide for Directors, McGraw Hill, Sydney.
[16]	Garg, A. K. (2007). Influence of Board Size and Independence on Firm Performance: A Study of Indian Companies. Research, 32 (3), 39-60.
[17]	Perry, T. and Shivdasani, A. (2005). Do Boards Affect Performance? Evidence from Corporate Restructuring. The Journal of Business, 78 (4), 1403-1432.
[18]	Jackling B. and Johl S. (2009). Board Structure and Firm Performance: Evidence from India’s Top Companies. Corporate Governance: An International Review, 17 (4): 492–509.
[19]	Ameer R., Ramli F. and Zakaria H. (2010). A new perspective on board composition and firm performance in an emerging market., 10, 647-661.
[20]	Uadiale, O., M. (2010). The Impact of Board Structure on Corporate Financial Performance in Nigeria. International Journal of Business and Management, 5 (10), 155-166.
[21]	Bhagat, S., and B. Black 2000. “Board Independence and Long-Term Firm Performance.” Unpublished paper, University of Colorado.
[22]	Hermalin, B. E., and Weisbach, M. S. (2003). Board of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature. Economic Policy Review, 9 (1), 7-26.
[23]	Peng, M. W. (2004). Outside Directors and Firm Performance during Institutional Transitions. Strategic Management Journal, 25, 453–471.
[24]	Andres Pablo de, Azofra V. and Lopez F. (2005). Corporate Boards in OECD Countries: size, composition, functioning and effectiveness. Corporate Governance, 13 (2), 197-210.
[25]	Kajola, Sunday O, (2008). Corporate Governance and Firm Performance: The Case of Nigerian Listed Firm. European Journal of Economics, Finance and Administrative Sciences, ISSN 1450-2887 Issue 14.
[26]	Dalton, D. R., Daily, C. M., Ellstrand, A. E., and Johnson, L. J. (1998). Meta - Analytic Review of Board Composition, Leadership Structure and Financial Performance. Strategic Management Journal, 19 (3), 269-290.
[27]	Fama, Eugene F., and Jensen, Michael C. (1983). Separation of Ownership and Control. Journal of Law and Economics, 26, 301–25.
[28]	Nam, SW. & Nam, IL. Chong (2004). Corporate governance in Asia: Recent Evidence from Indonesia, Republic of Korea, Malaysia, and Thailand. Unpublished manuscript, Asian Development Bank Institute, Tokyo.
[29]	Valenti M. A., Luce R., Mayfield C., (2011). The effects of firm performance on corporate governance. Management Research Review, 34 (3), 266 – 283.
[30]	Rhoades, D. L., Rechner, P., L. and sundaramurthy Chamu (2001). A Meta-analysis of Board Leadership Structure and Financial Performance: are “two heads better than one”?. Empirical Research-based and Theory-building Papers, 9, 311-319.
[31]	Mohamed Belkhir, (2009) "Board of directors' size and performance in the banking industry", International Journal of Managerial Finance, 5 (2), 201 – 221.
[32]	Rashid, A., De Zoysa, A., Lodh, S. and Rudkin, K. (2010). Board Composition and Firm Performance: Evidence from Bangladesh. Australasian Accounting Business and Finance Journal, 4 (1), 76-95.
[33]	Yermack, David (1996). Higher market valuation of companies with a small board of directors. Journal of Financial Economics 40, 185–212.
[34]	Jensen, M. C. (1993). The modern industrial revolution, exit, and the failure of internal control systems. The Journal of Finance, 48 (3), 831‐80.
[35]	Vafeas N. (2003). Length of Board Tenure and Outside Director Independence. Journal of Business Finance & Accounting, 30 (7) & (8), 1043-1063.
[36]	Bathala C. T., Moon K. P., and Rao R. P. (1994). Managerial Ownership, Debt Policy, and the Impact of Institutional Holdings: An Agency Perspective. Financial Management, 23 (3), 38-50.
[37]	Fatma, BEN M. and Chichti, Jameleddine (2011). Interactions between Free Cash Flow, Debt Policy and Structure of Governance: Three Stage Least Square Simultaneous Model Approach. Journal of Management Research, 3 (2).
[38]	Jensen, M. (1986). Agency cost of free cash flow, corporate finance and takeovers. American Economic Review Papers and Proceedings, 76, 323-329.
[39]	Litov L. P. (2005). Corporate Governance and Financing Policy: New Evidence.
[40]	Williamson, O., E. (1988). Corporate Finance and Corporate Governance. The Journal of Finance, 43 (3), 567-591.
[41]	Alwi s. (2009). Dividend and Debt Policy as Corporate Governance Mechanism: Indonesian Evidence. Jurnal Pengurusan, 29, 111-127.
[42]	Utami, S., R. and Inanga Eno L. (2011). Agency Costs of Free Cash Flow, Dividend Policy, and Leverage of Firms in Indonesia. European Journal of Economics, Finance and Administrative Science, 7_24.
[43]	Adjaoud F. and Ben-Amar W. (2010). Corporate Governance and Dividend Policy: Shareholders’ Protection or Expropriation? Journal of Business Finance & Accounting, 37 (5) & (6), 648–667.
[44]	Khatab H., Masood M., Zaman K., Saleem S. and Saeed B. (2011). Corporate Governance and Firm Performance: A Case study of Karachi Stock Market. International Journal of Trade, Economics and Finance, 2 (1), 39-43.
[45]	Nam, SW. & Nam, IL. Chong (2004). Corporate governance in Asia: Recent Evidence from Indonesia, Republic of Korea, Malaysia, and Thailand. Unpublished manuscript, Asian Development Bank Institute, Tokyo.
[46]	Fama, E., and M. Jensen (1983). Separation of Ownership and Control. Journal of Law and Economics 26, 301-25.
[47]	Baltagi, B. H. (2005): Econometric Analysis of Panel Data, Third edition. Chichester: Wiley.
[48]	Ramdani D. and Witteloostuijn A. van (2010). The Impact of Board Independence and CEO Duality on Firm Performance: A Quantile Regression Analysis for Indonesia, Malaysia, South Korea and Thailand. British Journal of Management, 21, 607–626.
[49]	Topak, Mehmet S. (2011). The Effect of Board Size on Firm Performance: Evidence from Turkey. Middle Eastern Finance and Economics, 14, 119-127.
[50]	Aljifri, K. and Moustafa M. (2007). The Impact of Corporate Governance Mechanisms on the Performance of UAE Firms: An Empirical Analysis. Journal of Economic & Administrative Sciences, 23 (2), 71-93.
[51]	Bennedsen M., Kongsted H. C., and Nielsen K. M. (2008). The causal effect of board size in the performance of small and medium-sized firms. Journal of Banking & Finance 32, 1098–1109.
[52]	Peng M. (2004). Outside Directors and Firm Performance during Institutional Transitions. Strategic Management Journal, 25, 453-471.

Cite This Article

Plain Text BibTeX RIS

APA Style

Asamnew Techan Demeke. (2016). Corporate Governance Mechanisms and Firm Performance: The Case of Ethiopian Insurance Industry. Journal of Investment and Management, 5(2), 6-16. https://doi.org/10.11648/j.jim.20160502.11

Copy | Download

ACS Style

Asamnew Techan Demeke. Corporate Governance Mechanisms and Firm Performance: The Case of Ethiopian Insurance Industry. J. Invest. Manag. 2016, 5(2), 6-16. doi: 10.11648/j.jim.20160502.11

Copy | Download

AMA Style

Asamnew Techan Demeke. Corporate Governance Mechanisms and Firm Performance: The Case of Ethiopian Insurance Industry. J Invest Manag. 2016;5(2):6-16. doi: 10.11648/j.jim.20160502.11

Copy | Download

@article{10.11648/j.jim.20160502.11,
  author = {Asamnew Techan Demeke},
  title = {Corporate Governance Mechanisms and Firm Performance: The Case of Ethiopian Insurance Industry},
  journal = {Journal of Investment and Management},
  volume = {5},
  number = {2},
  pages = {6-16},
  doi = {10.11648/j.jim.20160502.11},
  url = {https://doi.org/10.11648/j.jim.20160502.11},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jim.20160502.11},
  abstract = {In this study the effects of board characteristics (specifically proportion of outsiders in the board, board size, CEO-Chairman duality, and board meeting frequency), debt policy, and dividend policy are investigated in the Ethiopian context using two theories of corporate governance, which are agency theory and stewardship theory. Financial performance is measured using return on assets and return on equity. The study used panel data and Pooled OLS regression to analyze the relationship between corporate governance mechanisms and firm performance using a data set of 8 insurance companies of Ethiopia over the period 2008-2012. The results show that proportion of outside directors, board size, debt ratio, and ownership have a significant negative effect on performance of insurance companies. However, boards meeting frequency, firm size and firm age, are identified to have a significant positive impact on firm performance. Dividend policy have no effect on firm performance while the effect of CEO-Chairman Duality remains untested since it is not practiced in any one of the insurance companies.},
 year = {2016}
}

Copy | Download

TY  - JOUR
T1  - Corporate Governance Mechanisms and Firm Performance: The Case of Ethiopian Insurance Industry
AU  - Asamnew Techan Demeke
Y1  - 2016/07/21
PY  - 2016
N1  - https://doi.org/10.11648/j.jim.20160502.11
DO  - 10.11648/j.jim.20160502.11
T2  - Journal of Investment and Management
JF  - Journal of Investment and Management
JO  - Journal of Investment and Management
SP  - 6
EP  - 16
PB  - Science Publishing Group
SN  - 2328-7721
UR  - https://doi.org/10.11648/j.jim.20160502.11
AB  - In this study the effects of board characteristics (specifically proportion of outsiders in the board, board size, CEO-Chairman duality, and board meeting frequency), debt policy, and dividend policy are investigated in the Ethiopian context using two theories of corporate governance, which are agency theory and stewardship theory. Financial performance is measured using return on assets and return on equity. The study used panel data and Pooled OLS regression to analyze the relationship between corporate governance mechanisms and firm performance using a data set of 8 insurance companies of Ethiopia over the period 2008-2012. The results show that proportion of outside directors, board size, debt ratio, and ownership have a significant negative effect on performance of insurance companies. However, boards meeting frequency, firm size and firm age, are identified to have a significant positive impact on firm performance. Dividend policy have no effect on firm performance while the effect of CEO-Chairman Duality remains untested since it is not practiced in any one of the insurance companies.
VL  - 5
IS  - 2
ER  -

Copy | Download

Author Information

Asamnew Techan Demeke

Department of Accounting and Finance, Addis Ababa University, Addis Ababa, Ethiopia

Download PDF

Sections

Plain Text BibTeX RIS

APA Style

Asamnew Techan Demeke. (2016). Corporate Governance Mechanisms and Firm Performance: The Case of Ethiopian Insurance Industry. Journal of Investment and Management, 5(2), 6-16. https://doi.org/10.11648/j.jim.20160502.11

Copy | Download

ACS Style

Asamnew Techan Demeke. Corporate Governance Mechanisms and Firm Performance: The Case of Ethiopian Insurance Industry. J. Invest. Manag. 2016, 5(2), 6-16. doi: 10.11648/j.jim.20160502.11

Copy | Download

AMA Style

Asamnew Techan Demeke. Corporate Governance Mechanisms and Firm Performance: The Case of Ethiopian Insurance Industry. J Invest Manag. 2016;5(2):6-16. doi: 10.11648/j.jim.20160502.11

Copy | Download

@article{10.11648/j.jim.20160502.11,
  author = {Asamnew Techan Demeke},
  title = {Corporate Governance Mechanisms and Firm Performance: The Case of Ethiopian Insurance Industry},
  journal = {Journal of Investment and Management},
  volume = {5},
  number = {2},
  pages = {6-16},
  doi = {10.11648/j.jim.20160502.11},
  url = {https://doi.org/10.11648/j.jim.20160502.11},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jim.20160502.11},
  abstract = {In this study the effects of board characteristics (specifically proportion of outsiders in the board, board size, CEO-Chairman duality, and board meeting frequency), debt policy, and dividend policy are investigated in the Ethiopian context using two theories of corporate governance, which are agency theory and stewardship theory. Financial performance is measured using return on assets and return on equity. The study used panel data and Pooled OLS regression to analyze the relationship between corporate governance mechanisms and firm performance using a data set of 8 insurance companies of Ethiopia over the period 2008-2012. The results show that proportion of outside directors, board size, debt ratio, and ownership have a significant negative effect on performance of insurance companies. However, boards meeting frequency, firm size and firm age, are identified to have a significant positive impact on firm performance. Dividend policy have no effect on firm performance while the effect of CEO-Chairman Duality remains untested since it is not practiced in any one of the insurance companies.},
 year = {2016}
}

Copy | Download

TY  - JOUR
T1  - Corporate Governance Mechanisms and Firm Performance: The Case of Ethiopian Insurance Industry
AU  - Asamnew Techan Demeke
Y1  - 2016/07/21
PY  - 2016
N1  - https://doi.org/10.11648/j.jim.20160502.11
DO  - 10.11648/j.jim.20160502.11
T2  - Journal of Investment and Management
JF  - Journal of Investment and Management
JO  - Journal of Investment and Management
SP  - 6
EP  - 16
PB  - Science Publishing Group
SN  - 2328-7721
UR  - https://doi.org/10.11648/j.jim.20160502.11
AB  - In this study the effects of board characteristics (specifically proportion of outsiders in the board, board size, CEO-Chairman duality, and board meeting frequency), debt policy, and dividend policy are investigated in the Ethiopian context using two theories of corporate governance, which are agency theory and stewardship theory. Financial performance is measured using return on assets and return on equity. The study used panel data and Pooled OLS regression to analyze the relationship between corporate governance mechanisms and firm performance using a data set of 8 insurance companies of Ethiopia over the period 2008-2012. The results show that proportion of outside directors, board size, debt ratio, and ownership have a significant negative effect on performance of insurance companies. However, boards meeting frequency, firm size and firm age, are identified to have a significant positive impact on firm performance. Dividend policy have no effect on firm performance while the effect of CEO-Chairman Duality remains untested since it is not practiced in any one of the insurance companies.
VL  - 5
IS  - 2
ER  -

Copy | Download