The Impact of Board Composition on Corporate Firm Perfomance Evidence From Listed Commercial Banks in Nepal

7/27/2019 The Impact of Board Composition on Corporate Firm Perfomance Evidence From Listed Commercial Banks in Nepal

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The corporate scandals such as Enron, Global Crossing, Tyco,

and World Com have shaken the Investors' confidence and

made it difficult for companies to raise equity from the stock

market (Agrawal, 2005).

The health of the financial system has vital importance and role

in the country (Das & Ghosh, 2007) as the failure can disrupteconomic development of the country (Abor, 2007).

Corporate governance was one of the factors contributing to

the financial crises that swept Asia beginning in 1997 (Mitton,

2002) (Lemmon & Lins, 2003). On the same way, a global financial challenge in late 2007

raised various question to settle financial sector stability and

which become a central challenge to bank regulators and

supervisors (Nepal Rastra Bank, 2010).


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Corporate governance issues are getting special importance in transition

economies, as these countries do not have the long-established financialinstitution infrastructure to deal with corporate governance issues (McGee,

2010).

Meanwhile, the given infant stage of securities market development and

gradual transformation of the external sources of corporate finance from

bank to market, Nepal is passing through a transitional phase of institutionaland governance reform (Pokhrel, 2007).

The relationship between bank governance and its performance could be

studied by investigating the impact of element of corporate governance

(namely board size, board independence, audit committee size and audit

diligence and ownership structure) on bank performance. Several organizations like OECD, the World Bank, the IFiC , U.S. Commerce

and State Departments have popped up in recent years to help adopt and

implement good corporate governance principles (McGee, 2010).


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Nepalese Organization are mostly family owned and operated by

inexperienced family members holding positions like mangers, accountantsand other senior positions (Pradhan & Adhikari, 2009). Ultimately, the high

concentration of corporate ownership structure and dominance of family

business groups in corporate affairs have become major constraints in

exercising good corporate governance (Pokhrel, 2007).

Nepalese financial sectors were shocked when Nepal development bank went into liquidation in 2009,

NRB's management takeover action against Nepal Bangladesh Bank in 12/11/2006, action

against

Gorkha Development Bank for Corporate Governance in 2011,

Paschimanchal Development Bank's CEO suspension for lack of Corporate Governance in

2011 ,

action against People's Finance limited in 2011,

action against Nepal Share market limited in 2011,

activation of 'lender of last resort' measure in favor of Vibor Development Bank to solve

the liquidity crisis in 2011.

Kamal Gyawali Case


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The major objective of this research study is to

determine the impact of Board Composition

(Board Size, No. of Public Director,

Professional Director, and Female Director) on

firm performance (ROA & ROE) in Nepalese

Banks.


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Board Composition

BSIZE = Board size

PRODIR = Professional

Director

PDIR = No of Public

DirectorBDIVERSITY = No of

Female Directors

ROE = Return on

Equity

ROA = Return On

Assets

H1

Figure 1. The Research Model

CONCEPTUALFRAMEWORK

CG VariablesFirm Performance


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H1 Board size is negatively related to bank performance.

H2

Professional Director/ Board independence is

positively related to bank performance.

H3

Board Diversity is positively related to bankperformance.

H4

Public Director is positively related to Bankperformance


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S.N. Name Operation

1 ABIL Bank Limited (NABIL) 1984/07/16

2 epal Investment Bank Limited (NIBL) 1986/02/27

3 Standard Chartered Bank Nepal Ltd. (SCBN) 1987/01/30

4 Himalayan Bank Limited (HBL) 1993/01/18

5 epal SBI Bank Limited (NSBI) 1993/07/07

6 Everest Bank Limited (EBL) 1994/10/18

7 Bank of Kathmandu Limited (BOK) 1995/03/12

8 epal Credit and Commerce Bank Ltd. (NCCBL) 1996/10/14

9 Lumbini Bank Limited (LBL) 1998/07/17

10 epal Industrial & Commercial Bank Ltd. (NIC) 1998/07/21

11 Machhapuchchhre Bank Limited (MBL) 2000/10/03

12 Kumari Bank Limited (KBL) 2001/04/03

13 Laxmi Bank Limited (LXBL) 2002/04/03

14 Siddhartha Bank Limited (SBL) 2002/12/24


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S.N. Name Operation

15 Global Bank Limited (GBL) 2007/01/02

16 Citizens Bank International Limited (CBIL) 2007/06/-21

17 Prime Commercial Bank Limited (PCBL) 2007/09/24

18 Sunrise Bank Limited (SRBL) 2007/10/12

19 Bank of Asia Nepal Limited (BOA) 2007/10/12

20 DCBL Bank Limited (DCBL) 2008/05/25

21 MB Bank Limited (NMB) 2008/06/02

S.N Sources of Data Period

1. Nepal Stock Exchange (NEPSE) 2007/08-2011/12

2. Securities Board of Nepal (SEBON) 2007/08-2011/12

3. Annual Reports of Selected Banks 2007/08-2011/12

4. Nepal Rastra Bank official Website 2007/08-2011/12


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Variables Acronym Measurement

Dependent variables (Profitability):

Return on Equity ROE The percentage of Net Income to total equity.

Return on Assets ROA The percentage of Net Income to total assets.

Hypothesized variables:

Board Size BSIZE Total number of directors on the board.

Public Director PDIR No of Public Director

Professional Director PRODIR No of Professional Director

Board Diversity BDIVERSITY No of Female Director

Control variables:

Firm Size FSIZE The book value of the total assets of the

company.

Leverage / Debt proportion DEBT The percentage of total liabilities to total

assets.

Non Perfoming Loan Ratio NPL The percentage of non-performing loans to

total loan.


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ROE = 0 + 1 * BSIZE + 2 * PDIR + 3 *

PRODIR +4 * BDIVERSITY + 5 * FSIZE + 6 *

DEBT + 7 * NPL+ ROA = 0 + 1 * BSIZE + 2 * PDIR + 3 *

PRODIR +4 * BDIVERSITY + 5 * FSIZE + 6 *

DEBT + 7 * NPL+


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Descriptive Statistics

N Range Min. Max. Mean Std. D Var. Kurtosis

Statistic Statistic Statistic StatisticStatist

icStd.

Error Statistic StatisticStatist

icStd.

Error

ROA105 1.91 -.005 1.91 .096 .0357 .366 .134

18.590

.467

ROE105 1.08 -.354 .728

.164207

.011 .122 .015 5.702 .467

BSIZE105 4 5 9

7.285714E0

.0797 .817 .668 1.126 .467

BDIVERSITY105 3 0 3

.885714

.0988 1.012 1.025 -1.442 .467

PDIR105 3 0 3

1.533333E0

.0635 .651 .424 -.184 .467

PRODIR105 2 0 2

.695238

.0508 .521 .272 -.679 .467

DEBT105 .21 .74 .9523

.901026

.0035 .036 .001 4.953 .467

NPL105 .16 0 .1642

.017943

.0024 .025 .00117.30

3.467


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ROA ROE BSIZE BDIVERSITY PDIR PRODIR FSIZE DEBT NPL

ROA Pearson Correlation

1 .116 .197* -.206* .164 .140 .288** .117 .106

Sig. (2-tailed)

.238 .044 .035 .094 .153 .003 .236 .280

ROE Pearson Correlation

.116 1 -.077 -.375** .106 .339** .479** .340** .075

Sig. (2-tailed)

.238 .432 .000 .283 .000 .000 .000 .446

BSIZE Pearson Correlation

.197* -.077 1 .040 .289** .139 -.074 -.150 .212*

Sig. (2-tailed)

.044 .432 .687 .003 .158 .455 .127 .030

Pearson Correlation Table


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ROA ROE BSIZE BDIVERSITY PDIR PRODIR FSIZE DEBT NPL

BDIVERSITY Pearson Correlation-.206* -.375** .040 1 -.767** -.467** -.166 -.264** -.180

PDIR Pearson Correlation.164 .106 .289** -.767** 1 .483** -.004 .164 .227*

Sig. (2-tailed).094 .283 .003 .000 .000 .967 .094 .020

PRODIR Pearson Correlation

.140 .339** .139 -.467** .483** 1 .343** .174 .115

Sig. (2-tailed).153 .000 .158 .000 .000 .000 .075 .242

FSIZE Pearson Correlation.288** .479** -.074 -.166 -.004 .343** 1 .462** -.158

Sig. (2-tailed) .003 .000 .455 .090 .967 .000 .000 .107

DEBT Pearson Correlation.117 .340** -.150 -.264** .164 .174 .462** 1 -.005

Sig. (2-tailed).236 .000 .127 .007 .094 .075 .000 .960


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Model R R SquareAdjustedR Square

Std. Errorof the

Estimate

Change Statistics

R SquareChange F Change df1 df2

Sig. FChange

1.417a .174 .114 .3450102 .174 2.909 7 97 .008

b. Dependent Variable: Return on Assets

Model R R SquareAdjustedR Square

Std.Error of

theEstimate

Change Statistics

R SquareChange F Change df1 df2

Sig. FChange

1 .631a .398 .354 .09810 .398 9.151 7 97 .000

Predictors: (Constant), NPL, DEBT, PRODIR, BSIZE, BDIVERSITY, FSIZE, PDIR

Dependent variable: Return on equity


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ModelSum ofSquares Df Mean Square F Sig.

1 Regression 2.424 7 .346 2.909 .008a

Residual 11.546 97 .119

Total 13.970 104

a. Predictors: (Constant), Non Performing Loan, Debt Proportion, Professional Director, Board Size,

Board Diversity, Firm Size, Public Director

b. Dependent Variable: Return on Assets

ModelSum ofSquares Df Mean Square F Sig.

1 Regression .616 7 .088 9.151 .000a

Residual .933 97 .010

Total 1.550 104

a. Predictors: (Constant), NPL, DEBT, PRODIR, BSIZE, BDIVERSITY, FSIZE, PDIR

b. Dependent Variable: ROE


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Model

UnstandardizedCoefficients

StandardizedCoefficients

T Sig.

Collinearity Statistics

B Std. Error Beta Tolerance VIF(Constant)

-.380 1.062 -.358 .721

Board Size.106 .050 .237 2.145 .034 .699 1.430

Board Diversity-.089 .060 -.245 -1.469 .145 .307 3.257

Public Director-.033 .099 -.059 -.336 .738 .276 3.627

Professional Director

-.066 .082 -.094 -.813 .418 .632 1.582

Debt Proportion

-.378 1.108 -.037 -.341 .734 .719 1.390

Non Performing Loan

1.276 1.427 .088 .894 .373 .880 1.136

a. Dependent Variable: Return on Assets


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Variables Specific Hypothesis Empirically supported

Overall support ofmechanism

Board Size H1: Board size is negatively

related to bank performance.

Partially supported

Professional Director H2: Professional director is

positively related to bank

performance.

Supported by both the

model

Board diversity H3: Board diversity is


performance.

Not supported by both the

model.

Public Director H4:Public Director is


performance

Supported


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The overall data analysis conclude that there is a positive

relationship between the ROA, and Board size, Boarddiversity, public director, professional director, firm size, debt

proportion and non performing loan (overall model)

There is also the positive relationship between the Return on

equity with the Return on Assets and Board size, Boarddiversity, public director, professional director, firm size, debt

proportion and non performing loan (overall model).

There is a positive relationship between the board size and

Return on Assets (ROA), which indicates that increase in boardsize will increase the ROA and vice versa.

The relationship between the Board diversity and ROA is

inverse, which means that with an increase in board diversity

the ROA will decrease and vice versa


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In this research the Board size, Professional director, Public directorand Board Diversity are the board composition variable whereasthe Return on equity and Return on assets are the Bankperformance variable.

From the research we can explore that increase in board size willpartially increase the bank performance.

Similarly, professional director is positively related to the bank

performance, which indicates that if there is an increase in numberof professional director then it will increase the bank performance.

From the research it came to know that board diversity (Femaledirector) is negatively related to the bank performance, so, increasein the number of female director will decrease the performance ofbank.

On the other hand, public director is positively related to the bankperformance, which indicates that increase in the number of publicdirector will also increase the performance of bank.


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The control variables such as firm size, debt and

non-performing loan are also taken to measure

the bank performance.

Firm size is positively correlated with the Return

on assets and Return on equity, the bankperformance variable.

Similarly, the Debt proportion is also positively

correlated with the Return on equity and Returnon Assets, the bank performance variable.

Similarly the Non performing loan is also

positively correlated with the bank performance.


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The correlation (ROA and Specified independent

variable) R is 0.147 which indicates that there is apositive relation between the Return on Assetsand the independent variables but therelationship was not so significant. Similarly R

square is 0.174 which indicates that only the17.4% of variation in the ROA was explained bythe selected independent variables.

On the other hand, adjusted R square is 0.114which indicates that only the 11.4% of variationin the Return on Assets was explained by theselected independent variable after adjusting the

degree of freedom or the multi co - linearity.


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Documents

The Impact of Board Composition on Corporate Firm Perfomance Evidence From Listed Commercial Banks in Nepal