Mediating Effect of Corporate Social Responsibility on the Relationship between Corporate Governance and Financial Constraints Evidence from Sri Lanka

Abstract

This study investigates whether better Corporate Governance (CG) would lead to mitigate Financial Constraints (FC) and how Corporate Social Responsibility (CSR) mediates this relationship in companies listed in Colombo Stock Exchange of Sri Lanka. Additionally, this study aims at assessing the degree of CG, CSR and FC of the listed companies in Sri Lanka. The population that has been taken for this study is public listed companies in Colombo Stock Exchange (CSE) as at 31st March 2017 and 100 companies were selected as the sample based on the highest market capitalisation excluding banking, finance and insurance and investment trusts sectors due to its' inherent nature of being highly regulated and use of financial statements which are different from other companies. Descriptive statistics were used to assess the degree of CG, CSR and FC; regression analysis was taken to examine the direct relationship between CG while FC while Sobel Goodman Test was taken to examine the mediation effect of CSR on the above direct relationship between CG & FC. Results depict that degree of CG and CSR does not have a significant deviation from the findings of the local studies. Additionally, a negative relationship was investigated between CG and FC. Finally, the study concludes that a mediation effect of CSR does not exist on the direct relationship between CG and FC. This study will contribute to the extant literature by investigating the relationship between CG and FC with the mediating effect of CSR as empirical studies that were silent about the mediating effect of CSR to the above direct relationship.