Corporate Governance Practices and Profitability with Moderating effect of Financing Decisions

Abstract

The aim of the study is to examine the moderating effect of financing decisions on the relationship between corporate governance practices and the profitability of listed firms in Sri Lanka for the period from 2016 to 2020. For data analysis, 100 listed companies from the food, beverage, tobacco, capital goods, materials, and sectors of consumer services were selected as the sample, and a quantitative method and deductive approach were employed. Board size, board composition, CEO duality, board gender diversity, board meeting, and audit committee were proxies for corporate governance practices while profitability was measured through return on equity and return on assets of listed firms. The moderating variable and financing decisions were measured through long-term debt to total assets whereas firm size and firm age were considered as control variables. Panel data regression analysis was used for data analysis. The empirical findings reveal that board composition and audit committee have a direct negative impact on return on equity. Nevertheless, with the moderating effect of financing decisions, corporate governance variables, CEO duality, board gender diversity, board meetings and audit committee have a positive impact on return on equity. Moreover, the results show that board size and board meetings have a direct positive impact on return on assets. But, when moving to moderating effect of financing decisions, board size, board composition and audit committee have a positive impact on return on assets. However, board meeting has a negative effect.