Corporate governance effectiveness and operational risk in banks: the role of firm size

Abstract

While previous research works have extensively examined the direct relationship between corporate governance mechanisms and operational risk, there is limited understanding of how firm size moderates this link. Using a sample of 14 commercial banks in Ghana from 2010 to 2022, we analyse key governance dimensions, including board size, board independence, board meeting frequency, and board financial expertise, to determine their impact on operational risk. Firm size, measured by the natural logarithm of total assets, is introduced as a moderating variable to explore how it influences the governance-risk link. Data was analysed using pooled panel, random, and fixed effects models in Stata. The results indicate that larger banks benefit more from robust governance mechanisms, which help to mitigate operational risk, while smaller banks may experience varying effects. The study confirms the reliability of these findings through tests for serial correlation and heteroscedasticity, both of which indicated no significant issues. These findings provide a better understanding of how firm size affects corporate governance practices in managing operational risk within the banking sector. The study's limitations involve its concentration on Ghanaian banks and potential endogeneity issues, indicating opportunities for future research to examine wider contexts and additional governance factors.