Impact of Corporate Governance Mechanisms on Risk of Insolvency in Listed Non-Financial Companies in Sri Lanka.

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.