Abstract:
Literature is conflicting 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 firm-level data from 2016 to 2020 for a sample of 100 firms listed on the 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 used to measure corporate governance compliance on 18 board related best practices. Results of three random-effects panel regression models indicated that firm size has a statistically significant positive effect on corporate governance compliance. This implies that larger firms are better motivated or capable of complying with corporate governance due to their more extensive resource. This way they can benefit from the reduced agency cost and increased attractiveness for investors. Smaller firms might have considered compliance with corporate governance as less beneficial given the higher cost of compliance. Therefore, it would be more appropriate to make policies flexible enough in the application based on the firm-specific characteristics, such as the firm size. Even though attempts have been made to assess the effect of firm size on corporate governance using firm size as a control variable, this is the first study dedicated to investigating the size effect on corporate governance compliance in the Sri Lankan context.
