Colombo Stock Exchange Research Articles

Audit Committee Attributes and Firm Performance

"The audit committee provides considerable support when achieving corporate goals and objectives through practicing good governance in a firm. Although the audit committee is a critical element of corporate governance there is a dearth of studies relating to the audit committee. Thus, this research examined the impact of audit committee attributes on firm performance based on the Stewardship theory. The population for the study includes the listed companies in the Colombo Stock Exchange and the top 100 companies which have the highest market capitalization. The data collection study is an archival strategy based on the annual reports of the sample companies for the two years. The goals of this study are met with the help of EViews software and descriptive statistics and panel regression. The research findings of the study suggested that there is a positive relationship between Audit committee size, interlock of directors on the audit committee, and risk management committee with the firm's performance. The Interlock of directors on both the audit committee and nomination committee as well as the audit committee and remuneration committee have a negative relationship with the firm performance. Additionally, this study found that audit committee independence, financial expertise, audit committee diversification, and meeting frequency have no significant relationship with the firm performance. The findings of this study suggest that there should be audit committee compliance requirements that result in an increase in stewardship and improve performance which added new knowledge to Stakeholder theory."

Short – Term Forecasting for Daily Stock Market Indices using Discrete Fourier Transforms

The stock market indices are used to gauge the financial movements in the stock markets. If the index rises, the market is growing, and if it falls, the market is declining. The only stock exchange in Sri Lanka is operated by the Colombo Stock Exchange (CSE). Its two primary stock market indices are All Share Price Index (ASPI) and Standard & Poor’s Sri Lanka 20 (S&P SL20). Market indices provide information to investors. So, they can predict the risks and returns of their investments. While ASPI forecasts assist investors in understanding the future direction of the entire market, S&P SL20 forecasts help investors make investment decisions. Therefore, in order to make the correct investment decisions, it is crucial to identify appropriate forecasting methods for those two indices to meet investor expectations. The Discrete Fourier Transform (DFT) is a technique that can be used to convert a time-domain discrete signal into a frequency-domain discrete spectrum. In this study, the ASPI and S&P SL20 indexes were modeled as the Fast Fourier Transform amplitude spectrum using the daily stock values. The daily index data from the years 2017 to 2022 were used to formulate this model. The study also examined the periodic deviations of both indices during the considered period. Additionally, this research predicts the near future of both indices by modeling the daily indices values. To further verify the accuracy of the model, data from the SET (Thailand Stock Index) were employed. According to the results, the ASPI and S&P SL20 datasets show periodic patterns ranging from 4 days to 7 days and the SET datasets show periodic patterns between 5 and 6 days. The forecasting ability of the proposed Fourier model was assessed by using metrices such as Mean Squared Error (MSE), Mean Absolute Error (MAE) and Mean Absolute Percentage Error (MAPE). Finally, it is concluded that the proposed Fourier model is capable of forecasting the daily ASPI and S&P SL20 indices for a short period of time equivalent to their periodicities.

Relationship between Selected Macroeconomic Factors and the Stock Market Prices: Evidence from Colombo Stock Exchange, Sri Lanka

The stock market plays a vital role in all economies. In 2010, the Colombo Stock Exchange became the second-highest performing stock market in the world as many domestic and foreign investors invested in the Sri Lankan stock market with the end of the war. However, it has created a market bubble and no significant improvements reported since mid-2011. Further, the determinants of share market performance remain unclear. It is generally apparent that macroeconomic factors cause a sound impact on stock market performance. Thus, this study attempts to identify the causal relationship between share prices and the four major macroeconomic factors in the Sri Lankan economy. The dependent variable was the All Share Price Index (ASPI). Real gross domestic product (RGDP), Money supply (M2b), Balance of trade (BOT) and Net foreign investment (NFI) were the independent variables. Monthly data was used for 10 years spanning from January 2009 to December 2018 for all variables. Monthly bulletins of the Central Bank of Sri Lanka and the Colombo Stock Exchange data library were used to get data. Stata13, the statistical software was utilized to analyze the data. Descriptive analysis, correlation analysis, regression analysis, Johansen co-integration test and Vector Error Correction Model (VECM) were employed to identify how macroeconomic factors impact share prices. There was a co-integration between the dependent and independent variables. The study revealed that there was a long-run causality between the performance of the capital equity market and macroeconomic variables and the long-run equilibrium could be reached at a speed of 13.90%. Empirical results disclose that M2b and BOT had a positive impact on the ASPI. However, NFI had a negative influence on the ASPI. All variables significantly impacted ASPI except RGDP. The results of the study may help policymakers, investors, and other professionals to make proper decisions.

The Impact of Board Characteristics on Firm Performance of Largest Listed Companies in Sri Lanka

The purpose of this study is to examine the relationship between selected board characteristics and firm performance on listed companies on the Colombo Stock Exchange (CSE) in Sri Lanka. The study is performed on 41 non-financial and financial year’s ended on 31st March listed companies of CSE according to the highest market capitalization as of 20th January 2020. Descriptive statistics, correlation analysis and multivariate regression analysis are used to analyze the relationship between selected board characteristics and firm performance. As per the findings of this study, board composition is positively associated with Return on Asset (ROA) and Return on Equity (ROE). However, the gender diversity of the board shows a negative relationship between ROA and ROE. Other selected board characteristics of this study (Board size, CEO duality, frequency of board meetings, directors’ shareholding, presence of nomination committee) demonstrate ambiguous results with ROA and ROE. The findings of the study are supportive for policymakers, especially the top-level management, and decision-makers in respect of obtaining strategic decisions about the firm to establish an effective board and evaluate the effectiveness of the board inside the firm. Moreover, it will be useful for regulators to strengthen prevailing governance mechanisms attributed to the board of directors (BOD). Additionally, the finding will contribute to narrowing the existing indefinite results regarding the relationship between board characteristics and firm performance.

Dynamic Linkages among South Asian Stock Markets with Special Reference to Sri Lanka, Pakistan and India

This paper aims to examine the dynamic nature of equity market integration of key South Asian stock markets to determine and spotlight diversification potential by analyzing the linkages among three major South Asian Equity Markets; Karachi Stock Exchange (KSE), Bombay Stock Exchange (BSE), Colombo Stock Exchange (CSE). Ten years of monthly equity market index data were analyzed for long and short-term relationships through correlation, co-integration, granger causality, VAR model, Variance decomposition, and Impulse response analysis. It was found that the key South Asian stock markets are closely linked with each other depicting a long-run relationship. Also, it shows that the impact of shocks on regional markets, requires around two to five weeks for the shocks to be adjusted. There are diminishing diversification benefits for international investors by diversifying their portfolio among South Asian stock markets. But from tracking market indices can result in arbitrage or speculative profit, owing to weak adjustments in markets between the countries. South Asian stock markets are rapidly evolving and considered as a lucrative avenue by global investors owing to their immense growth and weak correlation with international markets.

Effect of Ownership Diversity on Financial Distress: Evidence from Colombo Stock Exchange

Ownership diversity is defined as the distribution of ownership and control among various categories of shareholders. Many organizations' ownership structures have become increasingly diversified in terms of race, nationality, gender, and socioeconomic level in recent years. Globally, there's little consensus on how ownership diversity affects financial distress. Using the agency theory and entrenchment hypothesis, this study investigates how the diversity of ownership affects the financial distress of business firms. This research makes a contribution to the empirical literature by applying panel data analysis on 181 non-financial companies from 2012 to 2019 on the Colombo Stock Exchange of Sri Lanka. The study uses Herfindahl-Hirschman Index to measure ownership diversity. In contrast, Altman Z Score Analysis, Emerging Market Score, and Interest Coverage Ratio measure financial distress. The results of the logistic regression models demonstrate that ownership diversity significantly and positively affects financial distress. This signifies that the diversified ownership structure raises the agency cost as it incurs high monitoring costs to monitor diverse shareholders, leading to financial distress within business firms.

Impact of Contextual Determinants Towards the Disposition Bias of Individual Investors in the Sri Lankan Stock Market

The findings are important for individual stock investors and potential investors significantly; can be attentive to their peculiar cognitive and emotive factors in their accurate investment decisions. Among the 306 individual investors in the Colombo Stock Exchange (CSE) was used as survey model. Through standardized questionnaires from earlier research studies, the events, beliefs, behavioral consequences, loss aversion, disposition, and investor sentiment assessed. AMOS software was used for the structural equation modelling (SEM) analysis of the data. The empirical data supported that loss aversion and investor sentiment positively impacted the disposition bias of individual investors. The events, beliefs and behavioral consequences (emotions) do not considerably drive factors of disposition bias in the Sri Lankan stock market. The results showed that loss aversion and sentiment are the primary causes of disposition bias, which is supported by the previous scholar's findings. The study supported loss aversion through disposition bias and the mediational impact of events. The main theoretical contribution is; the ABC model does not fully support in the Sri Lanka context to address the disposition where the loss aversion contributes to the execution of the disposition and moderating by investor sentiment. The existing outcomes will be useful for the investors, prospective investors and the stockbroker firms for maintaining and leading to substantial assertive decision making reducing of having biased decisions. The study identified the biases of a person's personality about nature in the early structure before leading to disposition bias. The second half of 2020 was used for which statistics were collected, and only the Sri Lankan market was included in the generalization. The macroeconomic implications and the institutional investors do not consider for the study due to complexity. The association between loss aversion and disposition bias was proved via the investigation. The paper recommended that investors with risk-averse prime for the disposition and the disposition is heavily influenced by a person's loss-averse personality, which is controlled by investor sentiment.

Impact of Integrated Reporting on Firm Performance in the Listed Companies in Sri Lanka

<p class="Default">The impact of integrated reporting on the firm performance of Sri Lankan listed companies was investigated in this study. A new reporting framework called integrated reporting tries to improve the ability of the investors for assessing the prospects of the firm and to remedy the shortcomings of the traditional reporting model of accounting. The study has included an analysis of quantitative data gathered from 42 companies listed on the Colombo Stock Exchange between 2016 and 2020. STATA - 14 software was used to analyze the data, which included panel regression analysis, correlation, and descriptive statistics. It has concluded that integrated reporting impacts the firm performance of the listed companies were based on the Return on Asset and Return on Equity. The study's findings demonstrated that Integrated Reporting has a significant negative impact on firm performance based on Return on Asset and Return on Equity while having a significant positive impact on firm performance based on Earnings per share.

Determinants of Debt Financing: An Empirical Analysis of Non-Financial Listed Companies in Sri Lanka

The purpose of this study is to identify the factors which determine the level of debt financing over the equity financing of the non-financial companies in Sri Lanka. The study is conducted on a sample of 30 companies from non-finance companies listed on the Colombo Stock Exchange (CSE). The sample consists of 20 companies that are selected based on the highest market capitalization and 10 companies which have issued debentures in the market. The data are obtained from the annual reports of sample companies for the years 2015 to 2018 for this purpose. A panel data regression analysis is conducted to analyze whether the firm performance, age, size, agency cost of debt, tangibility, sales growth, liquidity, and tax shield have an impact on the debt financing decisions of the firm. The pecking order theory, agency theory, and trade-off theory are used to explain the impact of determinants on debt financing. The findings of the analysis show that the firm performance, size, liquidity, tangibility, sales growth, and agency cost of debt have generated an inverse association with the firm leverage. Age and non-debt tax shield positively correlated with leverage according to the analysis. Findings are in line with the hypotheses developed except for firm size, tangibility, and non-debt tax shield. The size of the firm and tangibility deviate from the hypotheses developed while the non-debt tax shield is found to be insignificant in influencing its decision to apply for financing. This research has provided the basis to explore the determinants of debt financing in the overall capital structure of Sri Lankan firms. The results are useful for the managers and the policymakers to have knowledge about the firm-specific determinants of debt financing, and it should help corporate managers to make optimal capital structure decisions. This study contributes to enhancing the existing literature by analyzing the impact of determinants of debt financing in listed non-financial companies in Sri Lanka.

Interdependent Trading Behavior of Foreign and Local Investors: Evidence from the Colombo Stock Exchange

This study examines the interdependent trading behaviour of investors in foreign and local contexts with a particular reference to the Colombo Stock Exchange (CSE) of Sri Lanka to fill up the gap in the local literature regarding behavioural aspects and independence among foreign and local investors within their investment policies, procedures, and actions. Based on secondary data collected from a statistical sample drawn from daily trading statistics of CSE, covering both buying and selling actions of local and foreign investors for the period from 2007 to 2019, this study has examined the nature of four main investor groups namely foreign institutions, foreign individuals, domestic institutions, and domestic individuals in terms of daily purchases turnover, sales turnover, share volume traded purchases, and share volume traded sales data. The results showed that the local investors are quite irrational concerning the foreign investors. Hence, foreign investors' interdependence on local investors' behavioural information is weak. Local investors also highly rely on their trading behavior instead of being vigilant about the trading behaviour of foreign investors.

The Relationship between Corporate Governance and Firm Performance

This study examines the relationships between corporate governance attributes on firm performance of listed financial sector companies in Sri Lanka. Empirical analysis focused on 56 companies registered in the Colombo Stock Exchange (CSE) covering the industries of banking, finance and insurance for the years 2012, 2013, 2014 and 2015. The study used Ordinary Least Squares (OLS) method to analyze the data. The study finds that relationship between corporate governance and firm performance are not strong. Board size, proportion of independent directors and the proportion of female directors have not significant relationship with performance measures. But board effectiveness has a significant positive relationship with ROE. This study enables to companies to evaluate and restructuring of their board to enhance the performance of the company while contributing to the economic development of the country. Findings of prior study are more focused to the developed countries. This study fills that research gap and contribute to the present literature on corporate governance in the industries of banking finance and insurance.

Sustainability in an Emerging Market – In the context of the Top Management

The concept of CSR is still novel to Sri Lanka and firms in the country, and the adoption of the concept is in the initial phase. Scholars in developing countries are conducting studies based on CSR. This study aims to explore how and to what extent firms in emerging countries can conduct CSR activities; the types of benefits the firms can enjoy from CSR-driven activities; and the types of benefits that society can gain from CSR. This study provides insights into identifying existing CSR practices and analyze the benefits that they can generate. The study was conducted using 50 of the highest market capitalized firms listed on the Colombo Stock Exchange, Sri Lanka. The target group comprised 70 board of directors of the selected firms. A structured questionnaire was used for collecting data. The board of directors who responded believed that the most vital criteria in the CSR pyramid are economic responsibility. This response indicates that firms need to prioritise generating profits and then use their earnings for the wellbeing of society.

Effect of Psychological Factors and Financial Behavior on Financial Well-being of Equity Investors in Sri Lanka

This paper examines the effect of psychological factors and financial behavior on the financial well-being of individual equity investors in Sri Lanka. It draws upon the multi-theoretical linkage of social cognitive, prospect, and self-efficacy theories. The study uses survey data from 389 individual equity investors registered at the Colombo Stock Exchange. The results show that financial risk tolerance negatively impacts financial well-being, suggesting that those who are more willing to take risks have lower financial well-being. Results also show that financial behavior positively affects financial well-being. Our findings provide valuable information to the stock market participants, government, and other policymakers to understand the key determinants of financial well-being and identify the most critical areas of financial management practices to enhance the financial well-being of individual equity investors in Sri Lanka.

Audit Committee Characteristics, Gender Diversity and Earnings Management: Evidence from Listed Companies in Sri Lanka

The study aims to explore the impact of audit committee characteristics and gender diversity on the earnings management of listed companies in Sri Lanka. The sample comprises 107 companies listed on the Colombo Stock Exchange (CSE) for the five years from 2017 to 2021. The audit committee size, independence, financial expertise, and the number of audit committee meetings proxy for audit committee characteristics while gender diversity is measured by the number of female directors on the board. This study used discretionary accruals as a signal of the presence of earnings management. The results reveal that audit committee size and gender diversity have a negative effect on the earnings management practices of listed companies. A low level of audit committee independence has a major effect as a device in mitigating earnings management.

A STUDY ON EFFECTS OF EXCHANGE RATE FLUCTUATION ON STOCK RETURNS; EVIDENCE FROM COLOMBO STOCK EXCHANGE

The objective of this study is to empirically investigate the effects of exchange rate volatility on stock market return volatility from listed companies in Sri Lanka. This study utilizes daily time series data for the All Share Price Index (ASPI) returns of the Colombo Stock Exchange (CSE) and exchange rates over a period of seven years from January 2011 to December 2017. Further, the study utilizes the Generalized Autoregressive Conditional Heteroscedasticity (GARCH) estimation model in order to identify the impact of exchange rate volatility on stock market return. The empirical results of the study reveal that the volatility of Euro, Japan Yen, and US Dollars exchange rates has a positive and significant impact on ASPI return. Overall, the finding of the study highlight that exchange rate volatility is a determinant of stock market return volatility. The findings from this research could provide relevant insights into Sri Lankan listed companies. KEYWORDS: Exchange rate, Stock return, GARCH

ARIMA and FBMAP approach for forecasting daily stock price in Colombo Stock Exchange, Sri Lanka

The Ceylon Journal of Science is a peer-reviewed journal published quarterly by the University of Peradeniya, Sri Lanka in March, June, September and December. It is aimed at publishing high quality research articles on topics related to different disciplines in Science. The journal accepts original research articles, book reviews, reviews and mini-reviews, short communications, opinions, research notes, and commentaries and notes. The journal strictly adheres to publication ethics as emphasized by the Committee on Publication Ethics (COPE). The Journal has its own website.The Ceylon Journal of Science is indexed in Sri Lanka Journals Online (SLJOL), Directory of Open Access Journals (DOAJ), Google Scholar and Zoological Records. According to the Google Scholar; H5-Index: 12H5-Median: 15According to the Exaly (1970 – 2021); Impact Factor: 0.6 (top 19%)Extended IF: 0.6 (top 19%) H-Index: 8 (top 28%)Citations/paper: 1.42

Enterprise risk management: Challenges and the strategies for success

The objective of this paper is to identify the challenges of implementing and adopting an effective ERM system and to suggest alternative strategies that could be pursued as countermeasures to those challenges. This study is based on survey data gathered from 379 respondents representing 129 companies listed on the Colombo Stock Exchange of Sri Lanka. This study found that the lack of availability of information to make risk-based decisions; the need to ensure that all decisions are made within the organization’s risk tolerance level, and the lack of top management support for ERM implementation; are the most influencing challenges for business organizations that obstruct ERM effectiveness. This study suggests that organizations should promote a good corporate culture that fosters ERM supportive internal environment. It is also suggested that the support of the top management and their commitment to being corporative with the firms’ ERM function without making ERM is the sole responsibility of the finance people. Further, it is suggested that organizations have a designated position dedicated to overseeing the ERM function and providing executive leadership for its effective implementation.

The aftermarket performance of initial public offerings: New evidence from an emerging market.

This paper presents new updated evidence on the initial public offering (IPO) aftermarket performance for 144 public listed firms on the Colombo Stock Exchange from 1991 to 2017. We found that average aftermarket returns are always lower than 1%. On average, buy and hold abnormal returns are negative in a short period, and abnormal returns gradually become positive over a longer period (12.46% in 3 years). Further, aftermarket returns are positively related to investor sentiment and the annual volume of listings while being negatively related to initial returns, which is consistent with the divergence of opinion hypothesis. We suggest that investors should hold their subscriptions of IPO shares for a prolonged time, usually exceeding two years, as the dynamic of shares rewards the investors with positive abnormal returns in the long run.

Corporate Governance Compliance among the Listed Firms in Colombo Stock Exchange: Does Size Matter?

Literature is conflicting on the determinants of corporate governance, particularly relating to emerging financial markets. Therefore, this study examined whether firm size affects corporate governance compliance based on firm-level data from 2016 to 2020 for a sample of 100 firms listed on the Colombo Stock Exchange selected using the systematic random sampling technique. Firm size was measured using the natural logarithm of total assets. A corporate governance index was used to measure corporate governance compliance on 18 board related best practices. Results of three random-effects panel regression models indicated that firm size has a statistically significant positive effect on corporate governance compliance. This implies that larger firms are better motivated or capable of complying with corporate governance due to their more extensive resource. This way they can benefit from the reduced agency cost and increased attractiveness for investors. Smaller firms might have considered compliance with corporate governance as less beneficial given the higher cost of compliance. Therefore, it would be more appropriate to make policies flexible enough in the application based on the firm-specific characteristics, such as the firm size. Even though attempts have been made to assess the effect of firm size on corporate governance using firm size as a control variable, this is the first study dedicated to investigating the size effect on corporate governance compliance in the Sri Lankan context.

DETERMINANTS OF WORKING CAPITAL REQUIREMENTS: EVIDENCE FROM COLOMBO STOCK EXCHANGE

Working capital management is one of the crucial factors in shaping the financial performance of firms while ensuring their existence and growth. The study aims to investigate the determining factors of working capital requirements in the Sri Lankan context. The study was conducted using secondary data, manually collected from a sample of 37 firms listed on the Colombo Stock Exchange over a six-year period from 2013/14-2018/19. The working capital requirement has been proxied through the working capital ratio as the dependent variable of the study whereas firm-specific and macroeconomic determinants were taken as the independent variables. Profitability, Cash conversion cycle, Leverage, Tobin’s Q, Firm size, and Altman Z-score have been used as firm-specific determinants and the GDP growth rate, Interest rate, and Inflation has been considered as the macroeconomic determinants of the study. Initially, summary statistics were obtained for the sample along with the diagnostic tests of normality and multicollinearity. The regression models were specified to test the hypotheses developed for the study where the analysis was performed using the Statistical Package for the Social Sciences (SPSS). The results were obtained by carrying out the Ordinary Least Square (OLS) regression method as an overall and specific analysis. Results of the overall analysis indicated that all firm-related variables except firm size have a significant relationship with the working capital requirements. Nevertheless, only the interest rate demonstrated a significant association with working capital amongst the macroeconomic factors analyzed in the study. The specific analysis provided slightly different results with both firm size and GDP growth reflecting a significant relationship with the working capital of firms. It was concluded that the profitability, cash conversion cycle, Altman z-score, leverage, and interest rate are the most influential determinants of working capital requirements amongst the factors considered under the analysis and also that the firm-specific variables are crucial over macro-economic variables in determining working capital requirements in the Sri Lankan context.