Causality between Financial Performance and Corporate Governance: Evidence from South African Financial Institutions

Purpose: This study sought to investigate causality between financial performance and corporate governance in 21 South African financial institutions comprising of insurance companies and banks. This study used panel annual data spanning from 2007 to 2020.Design/Methodology/Approach: Applied Principal Component Analysis (PCA) to integrate four corporate governance measures into a composite index, namely, corporate governance index (CGDEX). CGDEX is the regressand for this study; the explanatory variables are financial stability, performance, and risk appetite. To assess causality between financial performance and CGDEX, fixed dynamic effect and pooled mean group estimators were employed in the Panel Autoregressive Distributed Lag (Panel-ARDL) approach.Findings: In the long-run the analysis shows a bidirectional causality relationship between CGDEX and the capital adequacy ratio (CAR). As well as between CGDEX and financial stability (FSTAB). Furthermore, in the short-run, a bidirectional relationship between CGDEX and FSTAB. &Implications/Originality/Value: The study shows the pivotal importance of corporate governance measurements and their significance to causality nexus with financial measures. The findings ought to urge financial institutions to focus on how corporate governance is proxied and the significance of financial measures to the financial health of institutions. A key limitation of this paper is that it did not account for structural breaks, and therefore, these events may have had a negative impact on the outcomes reported herein. The study extends the empirical literature on the role of corporate governance in the financial performance of financial institutions, using an emerging African economy as the unit of analysis.