Moderating effect of board independence on the determinants of financial performance in listed non-financial companies of Colombo Stock Exchange

Abstract

The overarching objective of every business organization is to maximize stakeholder wealth, but various financial constraints can hinder this goal. This study mainly focuses on examining the moderating effect of board independence on the determinants of the financial performance of listed non-financial companies in the Colombo Stock Exchange. There is a lack of research on the factors that determine financial performance at both the national and international levels. Further, there is a dearth of studies related to the moderating effect of board independence on the determinants of financial performance. The present study applied the quantitative approach. This study investigates the relationship between the Quick ratio, Total Assets turnover ratio, Leverage, and Growth in sales as independent variables and their impact on Financial Performance as the dependent variable. Additionally, the study incorporates board independence as the moderating variable. Financial performance is measured using Return on Assets (ROA). The study's population comprises listed non-financial companies on the Colombo Stock Exchange and data was collected from the top 100 companies with the highest market capitalization during the latest period spanning 2020 to 2022, descriptive statistics, correlation analysis, and regression analysis were used to analyze the data. This study has observed that total asset turnover and growth in sales have a positive and significant relationship with ROA. However, leverage has an insignificant relationship with ROA. The relationship between quick ratio and ROA is moderated by board independence. Further, the relationship between growth in sales and ROA is moderated by board independence on the other hand, the relationship between total asset turnover, leverage, and ROA is not moderated by board independence. The insights gained from this research will contribute to a better understanding of the determinants of financial performance in the context of listed companies on the Colombo Stock Exchange.