The relationship between corporate governance and insolvency risk among commercial banks in Liberia

Abstract

The recent scandals and corporate failures in the United States and in Europe have led to a renewed interest in research of corporate governance. Surprisingly enough, despite the importance of the topic, there are only a few studies on the corporate governance of banks. Further, to the knowledge of the researcher, no study has established the link between corporate governance and insolvency risk in Liberia. This is the gap that the present study sought to bridge by determining the relationship between corporate governance and insolvency risk among commercial banks in Liberia. The present study used a cross-sectional survey design. The population of this study was all the 8 commercial banks which have been operating during the period under study (from 2006 to 2010) in Liberia. Data was collected from the banks’ annual statements. The data sought was on board dimensions such as size, duality and cognitive diversity. This was the focus of corporate governance. The insolvency risk data was also sought from the same annual statements. The specific data sought for insolvency risk was measured as return on assets, shareholder capital and total assets. The data was analyzed using correlation and regression analysis. The study found that there were generally low insolvency risks in the banking industry in Liberia. This is because the highest insolvency risk was 0.411307 while the lowest was -2.5575. The mean insolvency risk was -0.1929. The study found that corporate governance was negatively correlated with insolvency risk (Pearson Correlation Coefficient, R= 0.572 with an adjusted R2 = -0.570). The study concludes that larger boards do not necessarily lead to lack of coordination and eventual increase in insolvency risk as prior studies have often proposed. This study highlights a result which is opposed to the various results of the studies which treats the problems of “corporate governance” of the banking firm in which the authors often suppose that the manager is averse to risk. The study recommends need to question the wisdom that larger boards are detrimental to corporate governance.