Impact of Board Characteristics on Firm Performance: Evidence from Ethiopian Microfinance Institutions

Abstract

The structure of the board of directors, as an integral part of a well-organized corporate governance mechanism, plays a crucial role in monitoring and controlling the firm’s executives, as well as improving firm performance. The study investigates whether certain board characteristics affect firm performance in a developing market context. The study uses a panel data set of 24 microfinance institutions determined by a purposive sampling technique. A fixed effects regression model was performed to explain the proposed relationships. Dynamic panel data using the generalized method of moments (GMM) model was subsequently used to address unobservable heterogeneity and endogeneity problems. The findings exhibit that a larger board size and the presence of independent directors on the board lead to enhanced firm performance. The findings also show that board meeting frequency has a significant negative relationship with firm performance. Again, the presence of females on the board of directors is not effective in the context of Ethiopian microfinance institutions, as we found board gender diversity does not significantly correlate with firm performance. Moreover, the results indicate that firm growth has a significant positive impact on firm performance, while firm age and leverage do not affect firm performance. Given the overall importance of corporate governance attributes, this study enables decision-makers and regulatory authorities to redefine the structure of the board of directors so that firms promote their board of directors’ effectiveness and, in turn, enhance firm performance.