Corporate governance and financial performance in the emerging economy: The case of Ethiopian insurance companies

Abstract

The function of the board in financial institutions differs from that of non-financial institutions because the board of directors’ discretionary power would be limited, particularly in regulated financial systems where financial institutions must operate under legislative and prescriptive procedures, policies, rules, and regulations. As a result, the goal of this research was to look into the effect of corporate governance on the financial performance of Ethiopian insurance companies that are heavily regulated. The study used an explanatory research design with econometric panel data from nine insurance companies from 2012 to 2020. Random effect estimation technique was used to find out the most significant variable. Return on asset and equity were used to measure the financial performance and board size, management soundness, board remuneration, financial disclosure, debt and dividend policy as explanatory variables. The result revealed that board size, management soundness, board remuneration, and financial disclosure have a positive and significant effect on insurance company financial performance, whereas debt and dividend payout have a negative and significant impact on insurance company financial performance. Thus, the study concludes that all corporate governance measures have a significant impact on insurance companies' financial performance in Ethiopia as measured both by return on asset and equity. The study contributes to managers and stakeholders to improve the financial performance. Therefore, directors and other stakeholders should put in place proper governance frameworks to improve financial performance and regulators and policymakers develop policies and regulations to guarantee that businesses adopt proper governance structures in order to improve performance.

Keywords:

• board size
• corporate governance
• disclosure
• financial performance and insurance companies

PUBLIC INTEREST STATEMENT

Insurance companies are essential stabilizers to smooth the financial volatility of businesses and to support the overall emerging economic growth and capital market development. Besides, corporate governance is vital because it creates a system of rules and practices that control how a company operates and how it aligns with the interests of all its stakeholders. Thus, this research was anticipated to survey the effect of corporate governance on the financial performance of insurance firms found in Ethiopia. The study revealed that management soundness and financial disclosure are significant in influencing the financial performance of insurance companies in Ethiopia. So as to increase financial performance Ethiopian insurance businesses should to improve their management soundness/quality and financial disclosure/transparency.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Bayelign Abebe Zelalem

Bayelign Abebe Zelalem is a fulltime lecturer in marketing management at Mizan-Tepi University, Ethiopia. Along with teaching and community service engagements, he is interested in doing research in the areas of financial markets, corporate finance and governance, business strategy, e-marketing and entrepreneurship.

Ayalew Ali Abebe

Ayalew Ali Abebe is a fulltime lecturer in cooperative at Mizan-Tepi University, Ethiopia. Financial markets, corporate finance governance, business strategy, entrepreneurship, small business developments and accounting information system are his areas interest in research in line with teaching and community service activities.

Sitotaw Wodajo Bezabih

Sitotaw Wodajo Bezabih is a fulltime lecturer in cooperative at Mizan-Tepi University, Ethiopia. He is interested in doing researches in the areas of corporate finance and governance, accounting information system, audit, taxation and entrepreneurship.