Title:
THE EFFECT OF CORPORATE GOVERNANCE PRACTICES ON FIRM'S PROFITABILITY: EVIDENCE FROM LISTED INSURANCE COMPANIES IN THE COLOMBO STOCK EXCHANGE

Authors:
Bogamuwa, MMSKB, Karunathilake, KAHT, Sri Lanka

Abstract:

In recent years, many insurance companies in Sri Lanka encountered many corporate governance issues due to conflicts of interest between a company's management and its shareholders. However, only a few studies investigate the effect of corporate governance practices on the firm's profitability of the listed insurance companies in Sri Lanka. In order to fulfill this existing research gap, this study examines the effects of corporate governance practices on the financial performance of the listed insurance companies of Sri Lanka throughout 2015 – 2019. The companies' corporate governance practices are measured by using Board Size, Board Independence, Audit Committee Independence, and Managerial Ownership, while Tobin's Q, Return on Assets, Return on Equity, and the Profit Margin were used to measures the firm's profitability. The Pearson correlation analysis was used to find the association between corporate governance practices and profitability. Four random effect panel regression models were used to find the impact of the corporate governance measures on each profitability measure. The results show that the Audit Committee Independence and Board Independence positively affect profitability measures while Managerial Ownership has a negative effect on the firm's profitability. In line with the above findings, it is recommended to adopt a conservative corporate governance practice while paying greater attention to the Audit Committee Independence and Board Independence as they favorably affect the profitability of the insurance companies listed on the Colombo Stock Exchange.