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Corporate Governance and Financial Performance Nexus: Any Bidirectional Causality?

Author

Listed:
  • Alley Ibrahim S.

    (Department of Economics, Fountain University, Osogbo, Osun State, Nigeria)

  • Adebayo Abimbola L.

    (Department of Accounting and Finance, Fountain University, Osogbo, Osun State, Nigeria)

  • Oligbi Blessing O.

    (Department of Economics, Western Delta University, Oghara, Delta State, Nigeria)

Abstract

Most studies on corporate governance recognize endogeneity in the nexus between corporate governance and financial performance. Little attention has, however, been paid to the direction of causality between the two phenomena, and hence the Vector Error Correction (VEC) model, which allows for endogenous determination of the direction of causality, has not been widely employed. This study fills that gap by estimating the nexus and the direction of causality using the VEC model to analyze panel data on selected listed firms in Nigeria. The results agree with the findings of most previous studies that corporate governance significantly affects financial performance. Board skills, board composition and management skills enhanced financial performance indicators – return on equity (ROE), return on asset (ROA) and net profit margin (NPM); in many occasions, significantly. Board size and audit committee size did not, and can actually undermine financial performance. More importantly, financial performance did not significantly affect corporate governance. On the basis of the lag structure of the VEC model, this study affirms unidirectional causality in the nexus, running from corporate governance to financial performance, nullifying the hypothesis of bidirectional causality in the nexus.

Suggested Citation

  • Alley Ibrahim S. & Adebayo Abimbola L. & Oligbi Blessing O., 2016. "Corporate Governance and Financial Performance Nexus: Any Bidirectional Causality?," International Journal of Management and Economics, Warsaw School of Economics, Collegium of World Economy, vol. 50(1), pages 82-99, June.
    • Handle: RePEc:vrs:ijomae:v:50:y:2016:i:1:p:82-99:n:6
    DOI: 10.1515/ijme-2016-0013
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    Cited by:

    1. Clement Olalekan Olaniyi & Olaolu Richard Olayeni, 2020. "A new perspective into the relationship between CEO pay and firm performance: evidence from Nigeria’s listed firms," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 22(2), pages 250-277, December.
    2. Marco Benvenuto & Roxana Loredana Avram & Alexandru Avram & Carmine Viola, 2021. "Assessing the Impact of Corporate Governance Index on Financial Performance in the Romanian and Italian Banking Systems," Sustainability, MDPI, vol. 13(10), pages 1-16, May.

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    More about this item

    Keywords

    corporate governance; financial performance; bidirectional causality; unidirectional causality; Vector Error Correction model;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • D2 - Microeconomics - - Production and Organizations
    • D7 - Microeconomics - - Analysis of Collective Decision-Making

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