Degree of Compliance with Corporate Governance Best Practices and Corporate Financial Performance of Public Listed Companies in Sri Lanka

Abstract

The importance of corporate governance became very clear as a result of many corporate scandals, failures, frauds, bankruptcies and disasters took place around the world in recent times. It is generally believed that a lack of sound corporate governance practices was one of the major reasons for these economic crises led to ruin shareholders wealth, loss of thousands of jobs, criminal investigation against executives, and a lot of bankruptcy filings in the United States of America, the United Kingdom, Japan, East Asian countries and all other parts of the world including large corporate failures in Sri Lanka. These issues have raised concerns about the reform of corporate governance practices throughout the world and have recently received much attention from policy-makers, regulators and the public. Considering the role of corporate governance practices through the lens of agency theory of Jensen & Meckling, this paper contributes to the existing knowledge in the field of corporate governance by exploring the relationship between corporate governance practices and corporate financial performance in terms of Return on Assets (ROA) and Return on Equity (ROE) specially paying attention on developing an index for measuring the degree of compliance with corporate governance practices. The study was conducted as a quantitative study based on secondary data collected from annual reports of fifty two public listed companies in Sri Lanka for the period 2009-2013. The unit of analysis of the study was a firm-year. Panel data regression analysis was used to test the hypothesis. The analysis indicates that compliance with corporate governance practices have a significant positive relationship with corporate financial performance in terms profitability of public listed companies in Sri Lanka.