The Impact of Board Governance on Financial Performance with the Mediating Effect of Capital Structure: Evidence from Non-Financial Listed Companies in Sri Lanka

Abstract

The main objective of this research study is to empirically investigate the relationship between board governance mechanisms and firm financial performance with the mediating effect of capital structure. Additionally, this study aims to assess the degree of board governance, capital structure, and financial performance. The scope of the research is narrowed down to nonfinancial listed entities in Colombo Stock Exchange (CSE) from 2016-2018, and 100 companies were selected based on sector-wise stratified random sampling. Based on the results of the study, the degree of Board Governance is in line with the findings of the studies done by Sri-Lankan researchers in the recent past. It was also found that there is a significant positive correlation of board governance with ROE. However, no correlation was identified between Board Governance and ROA. Based on the regression analysis it was examined that there is no significant relationship between board governance and firm financial performance. Finally, the results of the Sobel-Goodman test conclude that a mediation effect of capital structure does not exist on the direct relationship between board governance and financial performance. This study will contribute to the extant literature by investigating the relationship between board governance, capital structure, and firm financial performance as empirical studies were silent about the mediating effect of Capital structure in the relationship between board governance and firm financial performance. The outcomes of this research would also offer assistance to corporate decision-makers and managers in establishing an optimal capital structure. On the other hand, this research study would assist the regulatory authorities in passing laws and developing institutional assistance to make board governance mechanisms work more efficiently in the country.