Corporate Governance Practices and Their Impacts on Corporate Risk: Evidence from Sri Lanka

Abstract

The cost of failure of a single corporate has a fatal impact on the economy. In addition to the macro-economic conditions leading to corporate collapse, management is responsible for developing and implementing a sound system of risk management and internal control in order to avoid such collapses. As a result, discussions on governance and risk have reached an unprecedented level for academics and practitioners. Moreover, risk exposure and management are increasingly becoming the foremost functions of modern business enterprises. However research that integrates corporate governance and risk has been limited. This study examines therefore the impact of corporate governance practices on corporate risk of listed companies in the Colombo Stock Exchange in Sri Lanka. The Board structure, Board Independence and Board procedures were considered as independent variables, whereas, corporate risk as dependent variable. The corporate risk represented the financial, operational and market risks faced by the companies. Furthermore the study used data from a sample of 64 listed companies for 5 years from 2014 to 2018 and employ panel regression to uncover the relationship that exists between these variables. The independent sample t-tests was used to test whether there was a statistically significant difference exist between the corporate governance practices of distress and non-distress companies. The results show that the corporate governance practices of distress companies was significantly lower than that of non-distress companies. The findings of the regression results suggest that Board independence was significantly and negatively impact on corporate risk. However, Board structure and Board procedures have no significant impact on corporate risk. The study therefore, concludes that the increased representation of independent non-executive directors of the board contributed to the significant decrease of corporate risk.

Impact of Board Structure Characteristics on Financial Performance: Evidence from Selected Listed Companies in Colombo Stock Exchange

“…The firm size and director shareholdings significantly impact the firm performance of listed firms in Sri Lanka. Sameera (2020) found that board independence was a significant and negative impact on corporate risk; board structure and board procedures have no significant impact on corporate risk. Suganya and Kengatharan (2017) found that board size and non-executive directors had a significant relationship with ROA.…”

Effect of corporate governance on stock return in firms listed in Colombo Stock Exchange

“…In light of a series of recent corporate failures like WorldCom, Enron, and the US subprime mortgage crisis, researchers and policymakers worldwide have started revisiting the corporate governance guidelines (Brown & Caylor, 2006). The failures of Golden Key Credit Card, Pramuka Bank, and SR Property Sharing Investment are a few cases reported in Sri Lanka which have been directly attributed to agency conflicts and poor corporate governance (Azeez, 2015;Jayasinghe & Kumara, 2020;Kalainathan & Vijayarani, 2014;Sameera, 2020) The use of sub-indices and an extensive dataset covering a five-year period can be identified as the key contributions of this study. Due to these attempts, not only can the effect of different categories of corporate governance best practices be explored, but also the effects can be observed over an extended period.…”