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

Abstract

Since corporate governance acts as a monitoring mechanism in reducing agency issues, firms with higher corporate governance compliance are often associated with higher firm value, investor confidence, and stock liquidity. Recently, firms seem to comply more with corporate governance practices due to the increased awareness of these benefits and various policy initiatives. Nevertheless, literature provides conflicting evidence 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 a firm-level panel data set during the period from 2016 to 2020 for a sample of 100 firms listed in 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 formulated to measure compliance with 18 board-related corporate governance best practices while assigning them equal weights. Results of three random-effects panel regression models indicated that firm size has a statistically significant positive effect on the level of corporate governance compliance. This implies that larger firms are better motivated or capable of complying with corporate governance since they can benefit from the reduced agency cost and increased attractiveness for investors with their more extensive resource base. In contrast, smaller firms might have considered compliance with corporate governance less beneficial given the higher cost of compliance. This study makes three implications. First, one size fits all governance practices can be ineffective in Sri Lanka. Second, the findings highlight the necessity of formulating appropriate policies flexible enough in the application based on the firm-specific characteristics, such as the firm size. Finally, the literature suggests that a contextually relevant corporate governance index for Sri Lanka is still missing. Therefore, further research is required to formulate such an index with a broader perspective.