The Moderating Role of Board Independence on the Impact of Liquidity Risk on Bank Credit Ratings: Evidence from West Africa

Mohammed Ibrahim Abba, Simon Akpadaka, Dagwom Yohanna Dang and Musa Adeiza Farouk
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Mohammed Ibrahim Abba: Department of Financial Management, College of Private Sector Accounting, ANAN University, Kwall, Nigeria.
Simon Akpadaka: Department of Financial Management, College of Private Sector Accounting, ANAN University, Kwall, Nigeria.
Dagwom Yohanna Dang: College of Public Sector Accounting, ANAN University, Kwall, Nigeria.
Musa Adeiza Farouk: College of Private Sector Accounting, ANAN University, Kwall, Nigeria.

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Abstract: Purpose: This study looks at how board independence influences the relationship between liquidity risk and credit ratings in Nigerian, Ghanaian and Togolese listed banks. It attempts to investigate how governance arrangements affect the impact of liquidity risk on creditworthiness in emerging financial markets. Design/Methodology/Approach: Based on innovation, stewardship and financial development theories, the study uses an ex post facto research design and a purposive sample using data from 28 banks across three countries with publicly revealed credit ratings from 2012 to 2023. Standard & Poor's, Moody's and Fitch data were used to create a composite credit rating index (CRIndex) using Principal Component Analysis (PCA) to develop a unified credit rating index. the study employs OLS regression with robust standard errors to test its hypotheses. Findings: The results reveal a statistically significant and positive relationship between liquidity risk and credit ratings. Furthermore, board independence was found to significantly moderate this relationship, such that the positive impact of liquidity risk on credit ratings diminishes as board independence increases. Control variables, including firm size, profitability and country-specific effects, were also significant predictors of credit rating outcomes. Practical Implications: The findings underscore the importance of corporate governance structures in shaping how liquidity risk is interpreted by credit rating agencies. Regulators and financial institutions may consider tailoring governance and disclosure standards to reflect the nuanced effects of board independence, particularly in regions with concentrated banking systems and evolving regulatory frameworks. Originality/Value: This study contributes to the literature on financial risk and corporate governance by offering novel empirical insights into how board independence interacts with liquidity risk to influence credit ratings. The use of a unified CRIndex enhances the methodological robustness and the regional focus fills a notable gap in emerging market credit risk research.

Date: 2025-06-02
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Published in Asian Journal of Economics, Finance and Management , 2025, 7 (1), pp.415-435. ⟨10.56557/ajefm/2025/v7i1286⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05098617

DOI: 10.56557/ajefm/2025/v7i1286

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