Effects of corporate governance on firms’ value: the mediating role of credit risk
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Date
2023
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KNUST
Abstract
Poor corporate governance (CG) has been one of the causes of the recent financial sector crisis that characterized the Ghanaian banking sector. As a result, the current study was positioned to empirically examine the link between corporate governance and the firm value of commercial banks in Ghana, with a focus on the mediating effect of credit risk. In this regard, it aimed to address three specific objectives including, (1) to examine the effect of corporate governance and firm value (2) to investigate the influence of corporate governance on the credit risk of banks, and (3) to assess the mediating role of credit risk on the link between corporate governance and firm value of banks. With a population of 14 commercial banks (9 listed and 5 unlisted banks) over a study period of 17 years (that is from 2005 to 2021), the study employed the explanatory research design with a quantitative approach to investigate the study objectives. The dynamic models in the data analysis; thus, both the system and difference GMM were employed based on Bond et al. (2001) selection criteria. The study employed the indirect effect calculation method of Judd and Kenny (1981) to achieve the third objective. The dependent variables were Firm value measured by Tobin’s Q, and credit risk measured by the rate of NPL. The regressors were corporate governance (board size, board independence, audit size, and board diversity) and controlled variables (firm size and firm leverage). The study found that large board sizes and a more independent board of directors contribute positively to the marketbased valuation of banks. However, audit size was found to be inversely related to the value of banks. The study further revealed that audit size and board diversity cause a decrease in banks’ credit risk exposure, while it had a direct relationship with the board size of banks. Meanwhile, board independence had no significant impact on the risk exposure of banks. The indirect effect of corporate governance on firm value was mediated negatively by the credit risk of banks. Hence, for banks to attain growth in their market valuation, then good corporate governance should not be compromised.
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A thesis submitted to the department of accounting and finance, kwame nkrumah university of science and technology (institute of distance learning), kumasi in partial fulfilment of the requirement for the award of the degree of master of science (msc) accounting and finance