An Empirical Study on Corporate Governance Structure and Performance of Sri Lankan Listed Financial Services Companies

Abstract

With the rapid growth of financial service sector and past experience of distress of financial service companies in Sri Lanka, this study motivates to investigate the relationship between the corporate governance structure and performance of 59 listed financial service companies in Colombo Stock Exchange during the period of 2014-2017. Tobin’s Q and Return on Assets are used as financial performance measures. Our findings show that managerial ownership is significantly associated with the market performance measure but not with accounting performance measure. This negative relationship of managerial ownership with market based performance which suggests a managerial entrenchment effect where the management further their own self-interests rather than firms’ goals in the financial service industry. The results are consistent with the agency theory where managers are unlikely to maximize returns to shareholders. In addition, the study found that there is an insignificant relationship between other governance measures and the performance. The result is robust with respect to controls for gearing and company size. Key WordsCorporate Governance, ASPI, Corporate Performance, Managerial Entrenchment, Board Characteristics