Effect of Corporate Governance on Financial Performance of Companies Listed in CSE

Abstract

Corporate governance is in the limelight across the globe as result of a series of corporate failures directly attributable to agency issues. Consequently, many countries have formulated guidelines on corporate governance and incorporated into listing rules as well. Nevertheless, neither the level of compliance nor the effectiveness of the best practices is known without doubt. Therefore, this study measures the corporate governance compliance and investigates the effect of compliance on firm performance using a sample of 100 firms listed in Colombo Stock Exchange. Compliance was measured using a corporate governance index while firm performance was measured using ROA and Tobin’s Q. Findings showed a higher compliance in 2018 compared to 2014 while the compliance was higher in larger firms compared to their smaller counterparts. Nevertheless, an association between compliance and firm performance was not observed contrary to conventional literature. The evidence suggests that the claims made in stewardship theory may be valuable in redefining what constitutes corporate governance in Sri Lanka.