Corporate Governance Determinants of Bank Profitability and Market Valuation in Jordan

Abstract:

The aim of the current study is to examine how firms’ financial performance is associated with corporate governance in Jordanian commercial banks during 2010–2013. Utilizing a panel of bank- year observations, this study distinguishes between overall corporate governance quality as well as specific board-level governance mechanisms and considers the relationship in terms of both accounting-based performance measures (i.e., return on assets and return on equity) and market-based valuation (as captured by Tobin’s Q). Fixed-effects panel regression methods are employed to control for unobserved bank-specific factors and time effects. The results indicate that the overall quality of corporate governance, as represented by a combined Corporate Governance Index, is not significantly related to bank profitability or market value. Yet, as governance is decomposed at the mechanism level, board gender diversity (versus other board characteristics) appears to have a positive and statistically significant relationship with both ROA and ROE. Moreover, the valuation seems not to be significantly associated with governance arrangements, as indicated by the insignificant relationship with Tobin’s Q. The findings collectively imply that governance impacts bank performance in Jordan selectively rather than through a comprehensive system of governance. Enhancements in performance are associated more closely with certain composition attributes of the board than with strength of governance as a whole. Through evidence from a rarely studied emerging banking market, this analysis highlights the need to emphasize mechanism-specific governance attributes in studies of performance implications of corporate governance.