Doctor of Philosophy
School of Accounting and Finance
Manawaduge, Athula Sumith Preethi Gardiya, Corporate governance practices and their impacts on corporate performance in an emerging market: the case of Sri Lanka, Doctor of Philosophy thesis, School of Accounting and Finance, University of Wollongong, 2012. http://ro.uow.edu.au/theses/3676
Many corporate governance practices and reforms in emerging markets are based on corporate governance practices and systems of developed markets, but fail to recognize their suitability and compatibility to these markets. In Sri Lanka, most corporate governance practices are developed based on British practices and they are largely recommended through voluntary codes allowing companies to have considerable discretion in their implementation. The ownership structure of Sri Lankan companies is characterized by a prevalence of family ownership and concentrated ownership, resembling the characteristics of the relationship-based model of corporate governance. Therefore, the application of corporate governance practices originating in Anglo-Saxon countries which typically experience dispersed ownership creates many compatibility issues affecting overall efficiency of corporate governance systems in Sri Lanka. However, no prior study has examined such issues empirically. This study contributes to fill this gap in the academic literature through an in-depth examination of the corporate governance practices of Sri Lanka.
This study examines the nature and the level of compliance with corporate governance best practices by Sri Lankan public listed companies, with a view to identifying critical issues of corporate governance practices, and the relationship between level of compliance and firm performance in Sri Lanka. It also examines stakeholders’ perceptions of corporate governance practices in Sri Lanka and the impacts of ownership concentration on firm performance. Three separate data analyses are carried out to achieve these aims.
First, the compliance with corporate governance practices is examined through an analysis of a questionnaire survey covering 60 listed companies in Sri Lanka using a corporate governance index. The results show that levels of compliance by Sri Lankan companies to corporate governance best practices vary significantly among companies, and find that such variations directly relate to ownership structures of companies. The results provide prima facie evidence that family ownership and concentrated ownership have a negative influence on corporate governance practices while foreign ownership has a positive influence. The results further reveal that higher levels of compliance have a positive impact on financial performance, but have no impact on market performance.
Second, the stakeholder perceptions on eight aspects of the corporate governance system in Sri Lanka are examined using a questionnaire survey of 277 stakeholders from seven stakeholder groups. The analysis of results shows the majority of stakeholders are in agreement that sound corporate governance practices improve corporate financial, market and social performance, and the present status of corporate governance in Sri Lanka is not up to the required standard. Problems of corporate governance identified by stakeholders include: a lack of education in and awareness of corporate governance; inadequate regulations and enforcement; a lack of integrity and independence of directors; insufficient ethical standards; a lack of transparency; ownership concentration; and, political interventions, insider trading and corruption. Overall, the companies and regulators have failed to satisfy stakeholders’ expectations of corporate governance standards in Sri Lanka.
Third, on the premise of an agency theory framework, and using both accounting and market-based performance indicators, the relationship between ownership concentration and firm performance is examined. A regression analysis is carried out based on pooled data of 846 firm-years collected from 157 listed companies over the period of 2001 to 2009. The results provide evidence of a strong positive relationship between ownership concentration and accounting performance measures, suggesting a greater concentration of ownership leads to better performance. However, results found no relationship between ownership concentration and market-based performance, suggesting the prevalence of numerous market inefficiencies and anomalies in the Sri Lankan stock market.
Overall, the results suggest that compliance with corporate governance practices by respondent firms is closely associated with ownership structure and that better governance seems to correlate with higher financial performance of the firms. The companies with foreign ownership embrace the market-based governance framework thoroughly whereas the companies with family ownership or concentrated ownership raises the question how appropriate is the market-based model of corporate governance for Sri Lankan companies. A policy implication of the results is that the corporate governance reform efforts should pay more attention to enhance the effectiveness of boards. More broadly, priorities should be given to making internal corporate governance mechanisms work better and enhancing the roles of regulatory agencies.