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Corporate Governance and Financial Performance Nexus: Any Bidirectional Causality?

Ibrahim Alley, Adebayo Abimbola L. () and Oligbi Blessing O. ()
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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

International Journal of Management and Economics, 2016, vol. 50, issue 1, 82-99

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.

Keywords: corporate governance; financial performance; bidirectional causality; unidirectional causality; Vector Error Correction model (search for similar items in EconPapers)
JEL-codes: C3 D2 D7 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1515/ijme-2016-0013

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