Corporate Governance on Financial Performance: Evidence from Listed Commercial Banks in Sri Lanka

Abstract

Corporate governance is a widely accepted governing mechanism that is followed by a majority of organizations believing that it would help to improve the financial performance of the organization. Based on this scenario, this study examines the impact of corporate governance on the financial performance of listed commercial banks in Sri Lanka. Financial performance has been considered as the dependent variable while return on assets and return on equity have been considered as the proxies for the dependent variable. Corporate governance has been considered as the independent variable while board size, board balance, female directors, board meetings, and board ownership have been considered as the proxies to measure the independent variable. A deductive approach has been employed using secondary data which is obtained from listed commercial banks in Sri Lanka. Descriptive and inferential statistics such as Pearson correlation and panel data regression have been used for the analysis purpose. The results of the Pearson correlation revealed that board size has a positive correlation with banks’ financial performance while female directors show a negative relationship with banks’ financial performance. Panel data analysis recommended the random effect model as the best-fitted model for ROA and ROE. The result of the Robust specification test at a 95% significant level confirmed that, in panel A for ROA, only the number of executive directors shows a significant relationship while in panel B for ROE, both independent variables of a number of executive directors and board ownership show a significant relationship. The empirical findings of this study are helpful for any individual, institutional decision-makers, managers, academics, and any other parties who are interested in corporate governance.