Dynamic endogeneity and corporate governance-performance relationship: Lessons from the microfinance sector

Abstract

Purpose

The purpose of this paper is to examine the relationship between corporate governance (CG) and microfinance institution (MFI) performance, using a dynamic panel generalised method of moments (GMM) estimator to mitigate the serious issues with endogeneity.

Design/methodology/approach

Inconsistent findings and a general lack of empirical results for the microfinance industry leave an unclear message regarding the impacts of CG on MFI performance, especially in emerging economies. The authors use GMM estimation techniques to examine whether CG has an influence on MFI performance.

Findings

This study confirms that the MFIs’ contemporaneous performance and CG characteristics are statistically significantly positively linked with their past performance. This study finds statistically significant governance effects on MFI performance, including the presence of international directors and/or donor representatives on the board, client representatives on the board, percentage of non-executive directors and the quality of the national governance system.

Practical implications

These findings provide some insights for policy-makers and practitioners to develop suitable policies and guidelines to streamline MFIs’ operations in emerging countries. Moreover, national and international investors and donors may use these finding as a benchmark for their investment and funding decisions.

Originality/value

This paper is the first to estimate the CG and performance relationship of MFIs in a dynamic framework by applying the GMM estimation method. This approach improves upon traditional estimation methods by controlling the likely sources of endogeneity. Further, this paper examines whether quality of national-level governance characteristics is related to performance measures of profitability and outreach of MFIs.

Citation

Thrikawala, S., Locke, S. and Reddy, K. (2017), "Dynamic endogeneity and corporate governance-performance relationship: Lessons from the microfinance sector", Journal of Economic Studies, Vol. 44 No. 5, pp. 727-744. https://doi.org/10.1108/JES-12-2015-0220