Effect of Corporate Governance on Profitability of Firms Listed in Nigeria

Abstract

This study investigates the impact of corporate governance mechanisms on the profitability of firms listed on the Nigerian Exchange, focusing on the NGX 30 Index over the period 2014–2023. Profitability is measured by Return on Equity (ROE), while the governance attributes comprise board independence, gender diversity, board meeting frequency, institutional investor presence, and governance nomination and remuneration and risk management committee sizes. Audit quality is included as a control variable. The study employs the Mundlak Correlated Random Effects (CRE) approach to account for potential endogeneity arising from the correlation between time‐invariant unobserved firm‐specific characteristics and the explanatory variables, while distinguishing within‐firm from between‐firm effects. The results indicate that board independence has a significant positive effect on ROE, whereas gender diversity has a significant negative effect. Governance nomination and remuneration committee size exhibits a marginally negative effect, while board meeting frequency, institutional investor presence, and other governance attributes are statistically insignificant. The findings suggest that independent monitoring may enhance firm performance in Nigeria, whereas greater board diversity or committee size does not necessarily translate into higher profitability. The study provides evidence relevant to regulators and corporate stakeholders seeking to optimize governance structures and enhance shareholder value.