Corporate governance, antecedents and performance implications in the Ethiopian non-financial share companies : a contingency perspective

Abstract

Corporate governance has been a hot bed for scholars from diverse disciplines. Managers whose interests are not congruent with that of shareholders‟ do not have the incentive to maximize shareholder value. Agency theory implicitly assumes corporations as arenas of the principal-agent conflict. On the other hand, organizational perspectives maintain that firms differ in their adopted corporate governance level depending on the environmental contingencies in which they operate. This study develops a contingency framework by synthesizing agency theory and organization theory. The aims of this study are to examine the effect of firm level contingencies on corporate governance and examine the moderating impact of firm level contingencies on the relationship between corporate governance and firm financial performance in the Ethiopian non-financial share companies. Data were collected from public and private sources for 42 companies covering the period 2009-2013. For the first time overall corporate governance index is constructed from board structure, ownership structure, and disclosure and transparency. By specifying fixed effect regression models the study accounts for the presence of unobserved firm heterogeneity. Moreover, a moderation fixed effect model is specified for the corporate governance-performance relationship. Results show that firms choose their corporate governance in response to contexts in which they operate. High-risk firms have good corporate governance. Corporate governance is enhanced if the largest owner is government or bank. Findings show not only the positive influence of corporate governance on financial performance but also the positive effect of corporate governance on financial performance is enhanced where there are high agency problems. Firm growth, firm level risk and identity of the largest shareholder moderate the relationship between corporate governance and firm financial performance. The study contributes to the literature by providing evidence that firms endogenously choose their corporate governance and the effect of corporate governance on performance depends on firm level contingencies. For practice, the positive link between corporate governance and financial performance informs us that instituting and enforcing corporate governance should be taken seriously. Areas that require priority include the legal frameworks and their enforcement, additional corporate governance standards, strong financial market particularly a stock market. Future research can build on the limitations of the study. For instance, researchers can increase the sample size, compare industries or perform cross-country studies.