Impact of Corporate Governance Best Practice Code on Financial Performance of Companies Listed on the Colombo Stock Exchange

Abstract

Corporate governance is considered to have significant implications for the growth prospects of an economy. Good corporate governance practices are regarded as important in improving the performance of companies. The purpose of this study is to investigate the impact of corporate governance on financial performance of Sri Lankan listed firms. A number of aspects related to corporate governance, including board of directors, chairman and chief executive officer, board balance and appraisal of performance, disclosure of remuneration of directors, shareholders, accountability and audit, institutional investors and other investors and disclosure of sustainability reporting were examined in order to explore their influence on financial and market performance measured in terms of Return on Assets, Return on Equity, Tobin’s Q and Market to Book Ratio. Correlation analysis and panel regression analysis is used to analyze the data gathered from a sample of 96 publicly listed firms in 19 industries in the Colombo Stock Exchange in Sri Lanka. The findings of the correlation analysis results revealed that, there is no significant relationship between the overall governance scores and Return on Assets. In the case of Return on Equity, there is no significant relationship with the level of compliance of Corporate Governance. Further, there is no significant relationship between the overall governance scores and Tobin’s Q. Market to Book Ratio shows insignificant relationship with the overall corporate governance scores. Panel regression analysis results indicated that there is no systematic relationship of governance scores and Return on Assets. Further, overall governance score has revealed a significant positive coefficient with Return on Equity. The overall governance score has not systematically related with Tobin’s Q. Further results show that, there is no systematic relationship of overall governance score and the Market to Book Ratio. The results will assist regulators and policy-makers to better understand the impact of corporate governance on the financial performance of different types listed firms in Sri Lanka.