Corporate governance mechanisms and firm performance: empirical evidence from medium and large-scale manufacturing firms in Ethiopia

Abstract

Purpose This study aims to examine the impact of corporate governance mechanisms on financial and non-financial aspects of firm performance in medium and large-scale manufacturing firms in Ethiopia. Design/methodology/approach The cross-sectional survey and simple random sampling methods are adopted while the data collection is through a questionnaire that covers five corporate governance indicators consisting of the board independence, board effectiveness, shareholders role, internal audit effectiveness (IAE) and disclosure and transparency. The dimensions of firm performance were indicated by six firm performance indicators of customer and market (CM), internal process (IP), differentiation, efficiency, competitive position (CP) and financial (organizational) performance (OP). The covariance-based structural equation modeling (SEM) with the maximum likelihood parameter estimation technique was used to perform the data analysis. Findings A significant positive relationship has been found between the independence of the board of directors and firm performance (especially with respect to differentiation, OP, CP and IP). However, the board of directors’ effectiveness showed an unexpected result, significant negative effect on differentiation, OP, CP, CM and IP. The study also indicates a positive significant effect of disclosure and transparency on differentiation, CP and OP. However, the coefficient on the CM construct of firm performance is negative and significant. A significant negative linkage has also been revealed between IAE and two constructs of performance: differentiation and CP. One of the important findings of the study is that shareholders’ role has a significant positive impact on both board characteristics (board independence and board effectiveness) and firm performance (differentiation, efficiency, CP and OP). Research limitations/implications The study has two potential limitations. First, in comparison to prior studies, this study is based on a small sample size which limits the generalizability of the findings. Different scholars have suggested (Anderson and Gerbing, 1984, 1988; Iacobucci, 2010; Hair et al., 2019) that SEM requires a large sample size to test the hypothetical model. Thus, future research can further investigate the link between corporate governance and firm performance by using a larger sample size to achieve more reliable results. Second, the current study used a quantitative approach only, but prior studies (e.g. Ahrens and Khalifa, 2013) suggest a qualitative approach to more investigate and reach a very conclusive idea on corporate governance. The approach is currently receiving growing popularity in the literature. Practical implications The findings of the study would have measurable implications for different stakeholders who are in the position of supporting or regulating manufacturing firms. First, the findings give a clue about how a firm can design a good corporate governance system. Second, managers of the firm can get a hint or tip from the result that might help as input for designing strategies. Finally, it might help policymakers to understand and think about the very crucial role of active participation of shareholders in curtailing/reducing agency cost and enhancing firm performance apart from (beyond) the conventional corporate governance mechanisms (board of directors, internal audit, disclosure and transparency). Originality/value This study seeks to extend and contribute to the current literature in several ways. First, in contrast to previous studies, this study used both financial and non-financial performance measures and thereby providing new empirical insights relating to the non-financial performance measures. Second, this study provides a new result that the role of shareholders has a direct significant positive impact on board characteristics (i.e. board independence and board effectiveness) and firm performance. Finally, this study has come with a new insight that disclosure and transparency is a major driver of firm performance.

Organizational factors, knowledge management and innovation: empirical evidence from medium- and large-scale manufacturing firms in Ethiopia

“…We obtained data on a list of medium- and large-scale manufacturing firms from the Ministry of Industry and the Central Statistical Agency. The data showed that up to the end of the year 2018, 3,520 medium- and large-scale manufacturing firms were registered and operating in Ethiopia (Erena et al , 2022). A total of 200 firms were chosen at random for this study to collect the relevant data.…”

Analysis of the influence of enterprise managers’ overconfidence on the overinvestment behavior of listed companies under the media reports

“…Compared with positive reports, negative media reports can play a more important role in public opinion and supervision ( Jin and Qin, 2021 ). Erena et al (2022) and other studies found that the media reports and exposure of negative enterprise news will lead to a substantial decline in enterprise stock prices, affecting enterprise reputation and rating, and leading to a decline in enterprise investment capabilities ( Li et al, 2018 ). Wang et al (2022) deeply studied the relationship between enterprise performance and market response, and found that negative media reports can trigger a larger market response, thus playing the role of enterprise governance ( Han et al, 2021 ).…”

Guest editorial

“…However, in the context of Africa, there is still a paucity of research about the role of corporate governance in SDGs. Most studies examining the impact of corporate governance in African firms’ decision-making processes have focused on firm performance (Mangena et al , 2012; Darko et al , 2016; Assenga et al , 2018; Erena et al , 2022; Abang’a et al , 2022) and corporate reporting (Waweru et al , 2019; Chijoke-Mgbame et al , 2020). Thus, our knowledge about whether and how corporate governance contributes to the SDGs or sustainable development principles in Africa remains very limited.…”