CHAPTER THREE

RESEARCH METHODOLOGY

3.0Introduction

This chapter presents the research methodology for the study. Primarily, the methodology

explains the data collection and estimation method used in the study. First, there is a discussion

of the research design which underscores the reliability of the findings and conclusions drawn

from this study. Thus, the population, sample size, and sampling techniques, data sources and

collections as well as data management and analysis. Second, the model estimation and

specification is outlined. Basically, these include: data envelopment analysis and pooled OLS

model with panel corrected standard errors (PCSEs).

3.1Research design

Panel data is a special type of pooled data in which the same cross-sectional units is surveyed

over time. Panel data is preferred in this study because it has the advantages of: (1) providing

more accurate inference of model parameters; and (2) controlling the impact of omitted variables

or time heterogeneity (Gujarati & Porter, 2009). Panel data comes in two-folds: a balanced panel

and an unbalanced panel. With the former, the same units appear on each time period whilst with

the later, some units do not appear in each time period often due to attrition (Gujarati & Porter,

2009). The use of panel data method makes it possible to obtain more data points. There are a

variety of methods of estimating panel data which includes: pooled OLS model, fixed effect

model and random effect model. In pooled OLS model, data are elements of both time series and

cross-sectional data which are combined without recourse to the cross-sectional and time series
nature of the data. The pooled OLS model has the benefit of yielding more accurate predictions

of individual outcomes (Gujarati & Porter, 2009). The fixed effect model allows for

heterogeneity among the entities by allowing them to have their intercept value (Gujarati &

Porter, 2009). On the Other hand, the random effect model assumes that the discrepancy across

entities is random and uncorrelated with the explanatory variables (Gujarati & Porter, 2009). The

random effect model also allows for heterogeneity among entities but the entities have a common

expected value of the intercept (Gujarati & Porter, 2009). To achieve the objectives of the study,

the researcher made use of two stage approach (Banker & Natarajan, 2008). In line with this

approach, a decision had to be made concerning the appropriate model to be used. In order to

decide the appropriate model between FE model and RE model, Hausman test is performed. The

p-value for the Hausman Test is insignificant [chi2 (6): 6.22; p-value: 0.3992]; hence the random

effect model is preferred. The researcher therefore needed to decide the appropriate model upon

which the findings of this study will be interpreted. Thus, a comparison test was conducted using

Breusch and Pagan Lagrangian multiplier test for random effects. The test results showed that

pooled OLS was more appropriate than random effects [chibar2 (01): 0.00; p-value: 1.000].

However, given that there are criticisms of OLS estimates as being inefficient in the face of panel

data since the errors are likely to show panel heteroskedasticity and contemporaneous

correlation (Beck, 2001, p. 278), the researcher adopted Beck and Katz (1995) panel corrected

standard errors (PCSEs) to ensure that the sampling variability in OLS estimates of is

measured correctly, similar to studies by Alhassan & Ohene-Asare (2016). Hence, the results of

this study was based on OLS-PCSE.

3.2Population

The study is based on listed and non-listed banks in Ghana. This population is chosen to give a

true representation of banking industry in Ghana.

3.3Data and sample

Data to be used in this study comprises of year-end financial characteristics of banks in Ghana.

The sample consists of selected commercial banks for the period of 2010 to 2015. We collect

financial data between 2010 and 2015 from annual reports of the banks in the sample. The

observation period from 2010 to 2015 is used in order to capture the effect of the universal

banking license introduced in 2003. Only banks with six years financial data are considered in

order to provide a better representation of banks performance in terms of efficiency. The final

sample will consist of all commercial banks that have operated in Ghana from/before 2010. The

study employs an unbalanced panel data estimation of OLS regression modeling based on 119

bank-year observations. Data on corporate governance variables are manually extracted from the

various years annual reports of the banks in the sample based on content analysis.

3.4 Corporate governance measures

Basically, these measures only include board diversity, board independence and trust tenets of the

corporate governance mechanisms. They have been chosen because of their importance to the

banking industry (Basel Committee, 2006; Walker, 2009).

3.4.1 Control variables

As there is the likelihood of omitted variables bias, four other variables were incorporated to

control for the possible effects of bank efficiency. In essence, we control for banks size (Bokpin,
2013; Afrifa and Tauringana, 2015), leverage (Afrifa and Tauringana, 2015), and capital

adequacy ratio (Bokpin, 2013; Ramly et al, 2015)

3.5 Regression model

The following regression models are estimated to examine whether corporate governance is

related to bank performance.

NIMi,t = i + 1BDi,t + 2BIi,t + 3Tru_WOi,t + 4lnSIZEi,t + 5LEVi,t + 6CARi,t + i,t +

i,t ..(eq.1)

ROAi,t = i + 1BDi,t + 2BIi,t + 3Tru_WOi,t + 4lnSIZEi,t + 5LEVi,t + 6CARi,t + i,t +

i,t .(eq. 2)

ROEi,t = i + 1BDi,t + 2BIi,t + 3Tru_WOi,t + 4lnSIZEi,t + 5LEVi,t + 6CARi,t + i,t +

i,t (eq. 3)

Where i is bank 1 to 119; t is 2010 to 2015 financial year; NIMi,t,; ROAi,t; ROE the performance

indicators for bank i in period t; BDi,t the proportion of female directors on the board for bank i in

period t; Tru_WOi,t Trust Without (dummy variable assigned the value of 1 if bank i experiences

increase in deposit from customers in period t and 0 if otherwise); lnSIZEi,t is natural logarithm

for total assets for bank i in period t; LEVi,t the ratio of total liabilities to total assets for bank i in

period t; CARi,t the ratio of equity to total assets for bank i in period t; ROAi,t the ratio of profit

after tax to total assets for bank i in period t; ROEi,t the ratio of profit after tax to equity

investment for bank i in period t; NIMi,t the difference between interest income and interest

expenses as a percentage of total assets for bank i in period t; i the time invariant effect and i,t

the time variant effects.

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