The Impact of Corporate Governance on Firm Performance in an Unstable Economic and Political Environment: Evidence from Sri Lanka

Abstract:     
Corporate governance is considered to have significant implications for the growth prospects of an economy. Good corporate governance practices are regarded as important in reducing risk for investors, attracting investment capital and improving the performance of companies. However, the way in which corporate governance is organized differs between countries, depending on their economic, political and social contexts. Thirty years of civil war in Sri Lanka ended in 2007. Given the severe impact of the war on the economy, it was expected that the capital market would have declined during this period. Such was not the case. In fact, share prices rose substantially. In 2003 the Government had introduced corporate governance guidelines for listed companies. This paper argues that there was a relationship between the corporate governance initiative and the growth in the performance of firms from 2003 to 2007. This study examined the relationship between corporate governance practices and firm performance. Data were obtained from the annual reports of a sample of 37 companies selected from the top 50 listed companies in The Lanka Monthly Digest 50 (LMD) for the years 2003 and 2007. The data were analysed using Spearman’s correlations and analysis of variance. This study confirmed a positive relationship between governance practices (separate leadership, board composition, board committee and firm performance) based on return on equity, and board composition, board committees and performance measured by Tobin’s Q. These relationships indicate that firms have implemented corporate governance strategies, which have resulted in higher profitability and share price performance.

Number of Pages in PDF File: 17

Keywords: Corporate Governance, Sri Lanka, Board Structure, Firm Performance, unstable economic and political environment

JEL Classification: M19

working papers series