Influnce of Corporate Governance on Financial Health of Nepalese Commercial Banks

Abstract

This study aims to measure the impact of corporate governance on financial health of
commercial banks in Nepal. Return on assets, return on equity and earnings per share are the 
dependent variables used to measure financial helath and corporate governance variables such as 
board size, audit committee size, audit committee meetings and board diligence are considered as 
independent variables. Primary and secondary data were collected through the administration of 
structured questionnaire and from the annual reports of commercial banks respectively. Convenience 
sampling was used to select the commercial banks located in Pokhara valley for collecting primary 
data. Simple random sampling was used to select
10 commercial banks (5 joint venture and 5 non joint venture banks) out of total population of 27 
commercial banks for a time period of 2017/18 to 2019/20 for collecting secondary data. Multiple 
regression analysis and descriptive statistics were used in analyzing the data. Independent sample 
t-test was used to test the hypothesis in order to find out the relationship between corporate 
governance and financial performance.

The questionnaire survey reveals that board independence and audit committee independence are the 
most important variable for corporate governance. The primary data analysis concluded that small 
size board enhances the financial health. Transparency and disclosure is also an important feature 
of audit committee mechanisms. The analysis of secondary data reveals that audit committee meetings 
has a significant but inverse relationship with health of the commercial banks. The result 
indicates that priority should be given for quality of meetings but not the number of times such 
meetings are held due to the busyness of directors having better knowledge, expertise and their 
involvement in different sectors. The results support the idea that board busyness is useful factor 
for director quality. And busyness needs to be integrated with diligence to the extent that busy 
directors are diligent towards firms and they are able to exercise their expertise to positively 
influence firm performance. This study also helps the future researchers to conduct future research 
on impact of corporate
governance on financial health to extend with new data and huge sample.