Impact of Corporate Governance on Financial Performance of A & B Class Banks in Nepal
Keywords:
Panel study, fixed and random effect, board Size, board independence, frequency of board meeting, audit committee, female director, firm Size, leverage, GDP, inflation, return on asset, return on equityAbstract
This paper examines the impact of corporate governance on the financial performance of A and B class banks in Nepal. The study utilizes panel data from 26 commercial banks and 8 national-level development banks over a 10-year period from 2011 to 2020. Various corporate governance indicators, including Board Size, Board Independence, Frequency of Board Meetings, Audit Committee Size, and the presence of Female Directors, are used as explanatory variables. The performance indicators, Return on Assets (ROA) and Return on Equity (ROE), serve as dependent variables. Control variables such as Leverage and Firm Size, along with macroeconomic variables like GDP and Inflation, are also included. The research employs both Fixed and Random Effect Models, chosen based on the results of the Hausman test, to analyze the data. These models allow the researchers to assess variations among different banks and within individual banks over time.The findings reveal that all corporate governance indicators, namely Board Size, Board Independence, Frequency of Board Meetings, Audit Committee Size, and Female Directors, are insignificant in explaining firm performance as measured by ROA using the Random Effect Model. However, the control variable: Firm Size, shows a significant positive relationship with ROA, while Leverage and macroeconomic variables (GDP and Inflation) do not significantly affect ROA. Similarly, when measuring firm performance using ROE with the Fixed Effect Model, all corporate governance indicators remain insignificant. Firm Size and GDP show a significant positive relationship with ROE, whereas Leverage and Inflation are insignificant.Overall, the use of both Fixed and Random Effect Models indicates that corporate governance has an insignificant impact on firm performance. This suggests that, in the context of A and B class banks in Nepal, corporate governance does not play a significant role in influencing financial performance.
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