Abstract:
Corporate governance (CG) has become a pressing need today as it is legal
system that governs and controls a company. With the Covid 19 pandemic and
the 2022 financial crisis, the listed non-financial corporate sector in Sri Lanka
was exposed to high levels of volatility, profitability issues, liquidity problems
and customer defaults, which led to the bankruptcy of many institutions.
Accordingly, this study examines the impact of corporate governance
mechanisms on the risk of insolvency by examining 250 observations from 50
listed non-financial companies in the Colombo Stock Exchange. Here, as
independent variables such as board independence, board size, women on the
board, audit committee independence, and audit committee meeting frequency
are used as independent variables, while firm size and firm age are used as
control variables and the Altman Emerging Markets Z-Score (EMZ-Score)
model is used to measure the dependent variable. The Z-Score model inversely
measures the risk of insolvency, with a higher z-score indicating a lower
probability of insolvency. The data collected here are analyzed using E-Views
software and panel regression models are used to obtain descriptive statistics
and results. According to the panel regression analysis, board independence
shows a significant negative effect on insolvency risk, while audit committee
meetings show a significant positive effect on insolvency risk. Other variables
such as board size, women on the board, audit committee independence do not
have a significant effect on insolvency risk. Accordingly, it will be helpful for
future investors, legislators, and regulators in understanding how to strengthen
corporate governance mechanisms to reduce insolvency risk in a future crisis
environment.
