Abstract:
Corporate governance as a monitoring mechanism has gained renewed attention following a series of
corporate failures across the globe that are directly attributable to agency issues. Firms with higher
corporate governance compliance have often recorded higher performance, higher stock liquidity and
increased investor protection. Nevertheless, literature shows that smaller firms do not adopt corporate
governance practices as often as larger firms do. This study examines whether larger firms comply
more with corporate governance best practices than smaller firms using a sample of 100 firms listed
in the Colombo Stock Exchange (CSE). The firms were selected based on the systematic sampling
technique so that the sample evenly spreads across different firm sizes. The sample was split into two
equal subgroups as larger and smaller based on their firm size measured using total assets.
Compliance with corporate governance practices was measured using a corporate governance index
constructed with equally weighted 18 board related best practices based on the data collected for the
period ranging from 2018 to 2020. Three separate independent-samples t-tests were used to assess the
difference in corporate governance compliance between larger and smaller firms during each year.
The results suggest that corporate governance compliance in larger firms was significantly higher
compared to the smaller firms. This situation can be mainly attributed to the higher cost of
implementing corporate governance best practices, which is not affordable to smaller firms.
Moreover, smaller firms might have considered compliance as less relevant. In contrast, larger firms
are motivated to comply with corporate governance best practices even at a higher cost since they can
benefit from the reduced agency cost and increased attractiveness for investors. Therefore, it would
be more appropriate to identify these differences in compliance and make appropriate policies
flexible enough in the application based on the firm's specific characteristics, such as the firm size.
This is mainly because the literature has documented that only some corporate governance best
practices are effective and relevant in each context.
