THE EFFECT OF CORPORATE GOVERNANCE MECHANISMS ON FINANCIAL PERFORMANCE: EVIDENCE FROM SELECTED COMMERCIAL BANKS IN ETHIOPIA

Abstract

The paper takes a look at the effects of corporate governance on the financial performance of selected commercial banks in Ethiopia. The explanatory study was seeks to analyze the effect of different corporate administration mechanisms. Under this study, both internal and external factors were included. The internal factors used in this study was commercial bank size,, loan deposit ratio, income diversification, and commercial bank’s age whereas the external factors was effective tax rate and regulations of legal reserve and depositors influence on the financial performance of nine selected Ethiopian commercial banks. The financial performance measure was Return on Asset (ROA). A quantitative model of analysis had been adopted to achieve this objective, that is, by implementing secondary data collected from the National Bank of Ethiopia (NBE) and the selected banks head offices and branches. Panel data covering 7 year period from 2015-2021 was analysed and regression result with recommendation are displayed for the chosen banks. In order to identify the most significant variables among the calculated corporate governance variables, the multiple panel- linear regression model was applied. The findings indicated that, commercial banks size and legal reserve, had statistically insignificant positive effect on the chosen commercial banks financial performance. Commercial bank size have a negative insignificant effect at 5% level while income diversification, bank age and effective tax rate have a positive significant effect on the financial performance of selected commercial banks .The study provides suggestion for managers and the concerned bodies to strive in managing the factors that have a significant effect on financial performance.