Sri Lankan Firms Research Articles

Construction of a sustainability reporting score index integrating sustainable development goals (SDGs). The case of Sri Lankan listed firms

PurposeAlthough publicly listed firms in Sri Lanka have been increasingly adapting sustainability reporting into their annual reporting practices, a limited number of firms prepare sustainability reports by integrating sustainable development goals (SDGs) into reporting mechanisms. This study attempts to develop an index to monitor firms' sustainability reporting practices based on Global Reporting Institute (GRI) guidelines integrating SDGs.Design/methodology/approachThis paper develops a sustainability score index using the 17 SDGs utilising the results of content analysis of corporate annual reports of a selected sample of 100 firms listed on the Colombo Stock Exchange (CSE). Principal component analysis was employed to examine the reliability of data in the developed index.FindingsFindings show that the developed scoring index is efficient for evaluating the contents of the sustainability reports of Sri Lankan firms. Sustainability reporting practises with regard to the SDGs were observed to have a turbulent period from 2015 to 2019 and the SDGs 12 and 15 were identified to be mostly reported in Sri Lankan corporate sustainability reports.Research limitations/implicationsThe results of the study add to knowledge on the monitoring of sustainability reporting practises with reference to SDGs. The study outcomes are useful for the investors, stakeholders, and statutory bodies to measure the sustainable performance of business firms and assess the firm’s commitment towards the global sustainability agenda.Originality/valueTo the best of our knowledge, this is the first study that constructs a sustainability reporting score index integrating SDGs.

Corporate governance from colonial Ceylon to post-civil war Sri Lanka

This paper examines the corporate governance mechanisms in Sri Lanka, a country that only a little more than a decade ago emerged from a 30-year long civil war. We focus on the evolution of Sri Lanka’s corporate governance from historical, sociocultural, and institutional perspectives. Taking Sri Lanka as a case where inclusiveness and reconciliation at the board level is important, we aim to diagnose the key corporate governance issues which we then broaden towards other South Asia developing countries and provide a research agenda. Many Sri Lankan firms suffer from typical Asian-style agency problems; conflicts of interest between (i) minority and majority shareholders, (ii) shareholders and debtholders, and (iii) shareholders and stakeholders. The most prevalent agency problem is the expropriation of minority shareholders’ rights through ownership pyramids, cross-holdings, or intermediate private firms. Although creditor protection laws limit the expropriation of debtholders’ rights, firms’ widespread use of political connections forces banks to grant cheap credit at favorable terms. Poor stakeholder management creates agency problems following window dressing of ESG disclosures, corporate opacity, and ethnicity-and gender-based discrimination in the workplace. This study shows that social norms and ethical values play a non-negligible role in the functioning of the corporate governance regulation and in corporate culture in Sri Lanka.

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.

Effect of corporate governance on stock return in firms listed in Colombo Stock Exchange

Despite the enormous attention that corporate governance received following a series of corporate scandals, the effectiveness of prevailing governance best practices in achieving intended objectives remains a puzzle. Therefore, this study assesses the association between corporate governance and stock returns using the data on a sample of 100 firms listed in the Colombo Stock Exchange for the five years from 2016 to 2020. Four corporate governance sub-indices were formulated to measure the level of corporate governance compliance by classifying 18 board-related best practices into four sub-indices where each best practice is given the same weight. Capital gain, dividend, and total stock return were used as proxies for stock return. A series of random-effects panel regression models used in this study to analyse the data did not show adequate evidence to claim a positive association between stock return and corporate governance compliance. Only the basic board-related best practices show a weak positive impact on stock return. The main reason behind this finding could be the concentrated and family ownership structure prevailing in a large number of smaller firms in Sri Lanka. More precisely, the Sri Lankan firms have maintained satisfactory levels of stock return even when they do not comply with the corporate governance best practices. These findings highlight the necessity of formulating contextually relevant best practices instead of encouraging firms to comply with practices deemed best in developed markets.

Accounting information system and financial performance: Empirical evidence on Sri Lankan firms

The research aims to examine the effect of quality of Accounting Information System (AIS) on financial performance of listed companies in Sri Lanka. Out of 290 listed companies, 165 companies were selected as a sample using Proportionate Stratified Random Sampling technique and the sample size was calculated via sample size calculator in the web using a 95% confidence level and 5% confident interval. Quality of AIS was measured through system flexibility, system sophistication, effectiveness of the system and system control as per the Contigeny Theory and Innovation Diffusion Theory. Both primary (questionnaire) and secondary (annual report) data are combined in the study. A self-administrated questionnaire was issued to collect the quality of AIS, whereas the financial performances of such companies were evaluated under Return on Assets (ROA) by examining the annual reports of the selected companies. Descriptive, correlation and multiple regression analyses are applied to inspect the data. The study finds that there is a significant positive relationship between the quality of AIS and financial performance. Moreover, there is a significant impact of system flexibility, system sophistication, and effectiveness of the system towards financial performance; whilst system control also effect on financial performance, but the result is insignificant. Overall, the findings in this study are supported by other studies in the literature. The study provides a deeper understanding of how system flexibility, system sophistication, effectiveness of the system and system control of AIS quality relate to financial performance. It is recommended to maintain the highest levels of quality of AIS as it will be an advantage to raise the monetary performance of listed companies in Sri Lanka.

National development level effects on capital budgeting practices: a comparative study of nature vs nurture

Purpose This research should help determine whether development should focus on individual firms or will raising the national development level act like a rising tide and raise the performance of all corporations. Design/methodology/approach The comparative data used in this study come from 150 Australian (ASX200 index listed) firms and 150 Sri Lankan (Colombo Stock Exchange listed) firms. The research questions are answered via a quantitative research design that uses primary and secondary data. Findings The findings demonstrate that capital budgeting practices are more influenced by contingency features and sophistication in Australia and Sri Lanka. Also, Australian firms tend to use capital budget models with good-to-strong predictive power (except for ROE) and Sri Lankan firms tend to use capital-budget models with fair-to-poor predictive power. Further, the analysis of Australian firms yielded much stronger and more statistically significant results than the analysis of Sri Lankan firms. Practical implications In complex real-world situations, reconciling the outputs of a multifaceted approach to capital budgeting methods is more likely to give the depth and width of input needed to achieve an optimal capital investment plan. Originality/value The results of this study can provide rich information for stakeholders about new findings in capital budgeting (CB) practices and their contributions to firm performance in a comparative perspective.

Mergers and Acquisitions in the Indian Sub-Continent: 2010-2019

With rising growth rates and per capita income levels on the Indian subcontinent, foreign direct investment in the region, especially through mergers and acquisitions, has increased over the past decade. Using transaction data regarding the industry affiliation of the target and acquiring firms, deal size, deal structure, and deal completion rates from a worldwide M&A database compiled by Thomson Reuters’ Financial Services, this paper aims to provide contemporary and comparative information on merger and acquisition (M&A) activity in India, Pakistan, Bangladesh, and Sri Lanka over the last decade, 2010-2019. The findings have shown that the M&A transaction value and the number of deals in these four South Asian countries increased over this period. Similarities and differences among the four countries are discussed and compared. There was significant growth in the number of deals completed as well as the transaction value of mergers and acquisition activity in India, followed by Pakistan, Bangladesh, and Sri Lanka. Surprisingly, Sri Lanka had the second largest number of M&A deals, followed by Pakistan and Bangladesh. The findings show that Pakistan accounted for the second highest transaction value, followed by Bangladesh and Sri Lanka. It is interesting to note that the Sri Lankan M&A market had a high ratio (60 percent) of Sri Lankan firms acquiring other Sri Lankan firms, while in Bangladesh, non-Bangladeshi companies accounted for ninety-three percent of the value of all large M&A deals. Our future expectation for M&A opportunities in these four countries of the Indian subcontinent is that they will continue to expand. Future trends, important caveats, policy issues, and implications for managers planning M&A deals in the region are presented.

Dynamic effect of corporate governance on financing decisions: Evidence from Sri Lanka

This study investigates the role of corporate governance in influencing the debt financing decision of 198 non-financial listed companies in Sri Lanka from 2009 to 2016. Sri Lanka’s corporate governance (CG) code promotes dispersed ownerships, larger board size and balance of power and authority through various means, such as exclusivity between the Chief Executive Officer and Chairperson and the independent Board composition. This study tests the role of CG through four indicators while controlling for other firm-specific variables. Results of the two-step system Generalized Method of Moments on a balance panel data shows that the effect of CG indicators on financing decision depends on the financing terms. In general, the influence of CG indicators is significant on the two debt financing measurements, except for managerial ownership when investments in assets are involved. This influence appears eminent in predicting the debt ratio, although the effect is not necessarily consistent with the hypotheses. The latest revision on CG codes of best practices has also improved firms’ access to debt financing, except for raising long-term debt to acquire assets. Results imply that the Sri Lankan firms adopting the CG best practices would need to rely on other factors to access long-term debt financing or on other external financing sources.

Working capital management and firm value in emerging markets: the case of Sri Lanka

Working capital management, which involves managing cash, inventory, and accounts receivable, affects a firm’s short-term attainment. The purpose of this paper is to seek to investigate the relationship between working capital management and firm value in Sri Lankan firms. Data from 100 Sri Lankan firms a period of five years (2014-2018) are used for this purpose and analysed using the regression technique. The results indicate that there is a strong positive relation between the firm’s cash conversion cycle, number of day’s account payable and firm size and its firm value. Although, number of day’s account receivable and number of day’s inventory are found to be significant with negative sign. Overall the results imply that the Sri Lankan firms need to concentrate their limited resources on managing cash conversion cycle in order to be improve firm value.

Moderating effect of sustainability reporting on the relationship between board characteristics and firm financial performance

Purpose: This study primarily focuses on probing whether sustainability reporting has a moderating effect on the relationship between board characteristics and financial performance of Sri Lankan firms.
 Design / Methodology / Approach: The study draws on data from 50 listed companies in Colombo Stock Exchange (CSE) with the highest market capitalization during the period 2016 – 2018. This study considers seven board characteristics: board size, gender diversity, board independence, CEO duality, Number of board meetings held, nationality of board members and the number of members with PhD qualifications as independent variables to measure the board characteristics. Firm financial performance is measured by market and accounting based financial performance measures; ROA and Tobin’s Q. The Ordinary Least Square (OLS) regression models are applied and the moderating effect of sustainability reporting is measured using a GRI based index and PROCESS macro version 3.4 by Andrew F. Hayes.
 Findings: The results reveal that the sustainability reporting moderates the relationship between board characteristics and firm financial performance. Further, the results show that the board size, nationality of board members and number of board meetings held have statistically significant negative relationships with firm financial performance. Other independent variables: gender diversity, board independence, CEO duality and board members with PhD qualifications do not show a statistically significant relationship with firm financial performance.
 Practical Implications: This study contributes to the understanding of relationships between board characteristics and financial performance with the moderating impact of sustainability reporting. It provides academic evidence to policy makers in Sri Lanka for current and future governance reforms.
 Originality / Value: Recent local and global financial catastrophes have stressed the significance of following corporate governance mechanism either on a mandatory basis or a voluntary basis. Further, the sustainability reporting has become a contemporary concern in global context and adoption of globally accepted standards and principles has become a current practice in Sri Lankan context. Therefore, a study carried out to examine the relationships between such sustainability reporting adoptions, present governance characteristics and firm financial performance is a timely necessity in Sri Lankan context.
 Keywords: Board characteristics, Firm financial performance, Sustainability reporting

Determinants of Dividend Policy in Sri Lanka: The Panel Data Analysis

The study aimed to emphasize the determinants of dividend policy in Sri Lankan firms. This study was conducted with 80 non - financial companies which were listed on Colombo Stock Exchange (CSE). The empirical research was focused on panel data analysis, and data was collected from annual reports for a five year period from 2013 to 2017. This study explored selected factors that influence dividend policy, including sales growth, leverage, firm size, profitability, EPS, liquidity, and risk. The panel data analysis employed pooled OLS, fixed - effect, and random - effect models. Based on the analysis, the fixed - effect model was thought to be the best fit for studying the factors that affect dividend policy. According to the outcome of fixed-effect model, among the seven input variables considered in this study, profitability, EPS, and risk were negatively linked to dividend policy. However, no significant relationship was found between dividend policy and sales growth, leverage, firm size, or liquidity. The findings contribute to the understanding that three parameters namely: profitability, EPS, and risk have been recognized as factors affecting dividend payouts in CSE’s listed companies. Hence, policymakers will be able to concentrate on the factors that influence shareholder wealth maximization. Keywords: profitability, EPS, risk, dividend payout

Board characteristics and corporate social responsibility practices: in upper echelon theory perspective evidence from Sri Lankan Firms

Due to the heightened competition and advancements in the dynamic business environment, considerable attention is given to Corporate Social Responsibility (CSR). Most studies on CSR are quantitative and focused on linear relationships with profitability, firm characteristics, corporate governance and board diversity. However, little is known on how boardcharacteristics influence CSR Practices. Therefore, this qualitative study focuses on how board characteristics affect CSR practices in Sri Lankan contextfrom Upper Echelon theory (UET) perspective. The data was gathered via in-depth interviews conducted with directors in selected companies in Sri Lanka. The study revealed that both male and female directors have equal opportunity to raise voice on CSR in board discussions and female directors are more interested in CSR practices relating to women and children due to their psychological cognitive such asinherent compassion, empathy and understanding of women’s needs. The directors with multiple educational and professional qualifications, especially in accountancy, showed a sound knowledge on CSR. Further, well-experienced directors in multiple industries are also more concernedwith CSR and suggested genuine CSR practice as most companies use CSR as a promotional tool for building corporate image. It was further evident that the foreign directors have more exposure on CSR. According to the UET perspective, the different characteristics of upper echelon (board of directors) influence CSR practices.

An Analysis of Financial Distress Prediction of Selected Listed Companies in Colombo Stock Exchange

The main objective of the study is to predict financial distress and developing a prediction model using accounting related variables in selected listed firms in Sri Lanka. Decision criteria for financial distress has been selected based on the existing literature on financial distress prediction applicable to the Sri Lankan firms. A sample of 22 financially distressed firms along with 33 financially non-distressed firms have been used to conduct this study. Artificial neural network was used as the basic approach to the study in predicting financial distress. A neural network to predict financial distress was developed with an accuracy of 85.7% one year prior to its occurrence. The second analysis conducted was the panel regression considering five years of cross-sectional data for the sample of companies selected. This analysis was able to identify a significant relationship of leverage, price-to-book ratio and Tobin's Q ratio to the prediction of financial distress of a firm.

The Impact of Corporate Governance Mechanisms on Intellectual Capital Disclosure: Evidence from Non-Financial Listed Companies in Sri Lanka

The purpose of this paper is to examine the impact of Corporate Governance (CG) mechanisms on Intellectual Capital (IC) disclosure of non-financial listed companies of Colombo Stock Exchange (CSE). The study is conducted on a sample of 80 listed companies selected based on the highest market capitalization across six industry sectors of CSE. A content analysis is used to identify the level of IC disclosure and the agency theory and resource dependency theory are employed to develop hypotheses to examine the impact of CG mechanisms on the IC disclosure level. The results indicate that the Company Size has a significant impact on the level of IC disclosure. However, the findings also indicate that Independent Directors, Company Leverage, Company Performance, CEO Duality, and Block-holder Ownership do not have a significant impact on IC disclosures. This is an indicative symptom of the inefficiency associated with the CG mechanisms. Descriptive statistics show that the average IC disclosure level is about 32.4%. The content analysis shows that most Sri Lankan companies do not have IC disclosures as a separate section in their annual reports. The result further shows that a high variation of disclosure level among companies indicating a lack of consistency in adopting disclosure practices by the firms. The findings are particularly useful to policymakers, regulators, and corporate managers in identifying poor governance practices and the level of IC transparency of Sri Lankan firms. The paper also contributes to the international debate on corporate governance practices and mechanisms that can improve IC disclosures of listed firms in the emerging stock markets.

Corporate Tax Planning and Financial Performance of Companies Listed in Colombo Stock Exchange (CSE)

This study focuses on how best performing listed companies in CSE make strategies in tax planning to reduce tax liabilities without violating rules and regulations imposed by the Tax Authority. In this study, the corporate tax planning was measured by using the Effective Tax Rate (ETR) and the financial performance was measured by using Return on Assets (ROA). The sample of the study was designed based on criteria namely, the largest and most liquid companies in the Sri Lankan equity market and the sample period was restricted for the period 10 years from 2009-2018. The sample represents seventeen (17) companies which are used to calculate the S&P SL 20 index. Data was collected through the published annual reports of CSE of the selected listed companies during the selected financial time period. Co-integration regression along with Panel Dynamic Ordinary Least Squares (DOLS) statistical technique was used to explore this study. Johansen co-integration test confirmed to run the panel DOLS. According to the result of that, corporate tax planning has a negative impact on the financial performance of Sri Lankan best-performing companies listed in CSE however, which is not statistically significant at 5% level. It provides evidence that there is no significant impact from corporate tax planning strategies to the financial performance of listed companies in CSE. This evidence implies that Sri Lankan firms do not utilize the loopholes embedded in the Sri Lankan tax law efficiently. Keywords: Corporate Tax Planning, Colombo Stock Exchange, Co-integration regression, Effective Tax Rate, Financial Performance, Panel Dynamic Ordinary Least Squares, Return on Assets.

Corporate Tax Planning and Financial Performance of Companies Listed in Colombo Stock Exchange (CSE)

This study focuses on how best-performing listed companies in CSE make strategies in tax planning to reduce tax liabilities without violating rules and regulations imposed by the Tax Authority. In this study, the corporate tax planning was measured by using the Effective Tax Rate (ETR) and the financial performance was measured by using Return on Assets (ROA). The sample of the study was designed based on criteria namely, the largest and most liquid companies in the Sri Lankan equity market and the sample period was restricted for the period 10 years from 2009-2018. The sample represents seventeen (17) companies which are used to calculate the S&P SL 20 index. Data was collected through the published annual reports of CSE of the selected listed companies during the selected financial time period. Co-integration regression along with Panel Dynamic Ordinary Least Squares (DOLS) statistical technique was used to explore this study. Johansen co-integration test was confirmed to run the panel DOLS. According to the result that, corporate tax planning has a negative impact on the financial performance of Sri Lankan best-performing companies listed in CSE however, which is not statistically significant at 5% level. It provides evidence that there is no significant impact from corporate tax planning strategies on the financial performance of listed companies in CSE. This evidence implies that Sri Lankan firms do not utilize the loopholes embedded in the Sri Lankan tax law efficiently. Keywords: Corporate Tax Planning, Colombo Stock Exchange, Co-integration regression, Effective Tax Rate, Financial Performance, Panel Dynamic Ordinary Least Squares, Return on Assets.

Corporate social responsibility and dividend policy in Sri Lankan firms: A data triangulation approach

This study investigates the relationship between corporate social responsibility (CSR) and dividend policy (DP) using a data triangulation approach in the Sri Lankan context. The findings of the secondary data approach suggest that there is a positive impact from environmental and social CSR on both the likelihood to pay dividends and its payout. Findings of the primary data approach propose that ethical and philanthropic CSR dimensions show a positive impact on both likelihood to pay dividends and its payout. The findings of the triangulation approach revealed that CSR and DP tend to rise together. Hence, we argue that the generosity of the management paves the way towards shareholders' prosperity. This is the first study to investigate the CSR‐DP puzzle using a data triangulation approach. Future researchers could use this study as a guideline, if they intend to conduct a research study through data triangulation approaches especially in dividend policy and also in finance discipline.

Corporate governance and dividend policy in Sri Lankan firms: a data triangulation approach

PurposeThis paper aims to investigate the relation between corporate governance and dividend policy in Sri Lankan firms.Design/methodology/approachThe data set consists of market data using 1,608 firm-year observations from 201 firms listed on the Colombo Stock Exchange and survey-based data from 151 respondents from the same 201 firms. The authors use data triangulation to examine the two approaches.FindingsThe analysis of the market data reveals that a significantly positive relation between corporate governance on both the propensity to pay dividends and dividend payout. Survey analysis confirms these findings. Triangulated evidence supports the outcome model of dividends, free cash flow and agency cost theories.Practical implicationsThe findings are useful not only for management in developing suitable corporate governance practices and dividend policies for their firms but also for shareholders in evaluating both existing and new investments. Future researchers should investigate the same phenomenon in other contexts using triangulation approaches to confirm their findings.Originality/valueThis study is the first to use governance indices both in terms of survey and market-based data to examine the relation between corporate governance and dividend policy.

Sri Lankan intellectual capital disclosure: An empirical analysis

This study examines voluntary IC disclosure provided by Sri Lankan firms in annual reports from the year 2016/17. A 100-firms sample, from the Colombo stock exchange (CSE)-listed firms. Findings suggest that Sri Lankan firms, on average, are aware of the significance of IC disclosure. Concerning the descriptive analysis, the results indicate that most of the information reported (41 percent) is related to human capital; 31 percent is related to relational capital and the 21 percent concerns structural capital disclosure. The results also suggest that industry nature and firm size play a key role as a determinant for the disclosure of IC in Sri Lankan annual reports. As the no definite IC disclosure framework has been established within Sri Lankan firms. Concurrently as Sri Lanka passes through its post-war-recovery phase, reform of its mutually agreed financial reporting framework is essential to reduces information asymmetry and therefore reducing the agency costs.

HETEROGENEITY IN EARNING MANAGEMENT OF LISTED COMPANIES FOLLOWING INTERNATIONAL FINANCIAL REPORTING STANDARDS CONVERGENCE: A DEVELOPING COUNTRY EXPERIENCES

This study examines the earning management behavior of Sri Lankan firms following IFRS convergence. Moreover, we investigate whether the earning management following IFRS convergence is similar across different companies. We separately evaluate the companies based on size, auditor type, and performance to see whether these factors can moderate earning management behavior. We collected the data from a sample of 160 companies that are listed on the Colombo Stock Exchange (CSE) for the period spanning from 2008 to 2015. The period from 2008 to 2011 was the pre-IFRS convergence and the period after 2012 was the post-IFRS period. Following prior studies, we used several measures to capture the earning management around IFRS convergence. Especially, our measures aim to identify earning smoothing and managing towards earning target and thereby determining whether the firms have engaged in earning management and its increase and decrease. The results show that the earning management, in overall, has not decreased following IFRS convergence. However, our results indicate that the post-IFRS earning management is vary between companies. That is, large companies and companies with big four auditors experienced a decrease in earning management following IFRS convergence. Similarly, certain aspects of earning management of high performing companies is also found to have decreased in post-IFRS convergence. Finally, our findings provide important implications for regulators, investors and other corporate stakeholders.Keywords: Earnings Management, IFRS Convergence, Sri Lankan FirmsJEL Classifications: M410, M480, C2, C3DOI: https://doi.org/10.32479/ijefi.8872