Corporate Governance and Financial Performance of Nigerian Manufacturing Firms: Evidence from Dupont Analysis

Abstract

This study examines how corporate governance variables, Board Size (BDS), Board Independence (BDI) and Audit Committee Independence (ADI) affect the financial performance of Nigerian manufacturing firms, using DuPont analysis over 2012–2021. However, the study adopted Net Profit Margin (NPM), Asset Turnover (AST) and Debt-Asset-Ratio (DAR) as proxies for Financial Performance (Dependent variable). Ex-post facto design was employed using panel data extracted from fifteen (15) selected consumer goods manufacturing for 10 years, ranging from 2012 to 2021. The static panel estimator was utilised, and more explicitly, panel robust least squares (RLS) analysis was adopted to avoid the problem of non-normality or outliers in data. Three panel models were estimated for each of the Net profit margin, Asset turnover, and Debt-asset ratio as a measure of financial performance. Results show that Board Size positively influences Return on Equity, while other variables show mixed effects. From the results of the analysis, using agency and stakeholders’ theories as underpinning theories, it was revealed that BDS exerts a significantly positive influence on net profit margin, but BDI and ADI were noted to produce a negative but insignificant effect. While board independence exerts a positive effect on asset turnover, audit committee Independence showed a positive but insignificant effect on Asset turnover. Similarly, the findings also shown Board independence have significant positive influence on Debt-Asset Ratio (DAR), while BDS and ADI have an insignificant and inverse relationship on Debt to Asset Ratio. The study concluded that corporate governance variables have a significant effect on return on equity, as the CG proxies exert significant influence on the three elements of the dependent variables as enshrined in the DuPont analysis. Findings suggest and recommend that firms should optimize governance structures to enhance profitability and a proportionate increase in board size with the right mixture of executive and non-executive members, with a guarantee of probity.