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Corporate Governance & Its Impact on Firm Performance

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Sample Selection

For this study sample comprise 63 companies which are listed in Colombo Stock Exchange (CSE) for financial year 2017. As per the empirical studies, since banks and financial institutions have different rules & regulations to be adhered, Banking & finance institutions are excluded from the sample. The study is based on the secondary data published by the companies. Main source of data collection is from published annual reports of the companies for the financial year 2017. ROCE is obtained from the financial statements of each annual report & corporate governance variables are obtained from the corporate governance disclosures in each annual report. Cross sectional data of 63 companies have used for the study.

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Methodology

This study use regression analysis to test the relationship between the corporate governance variables and the firm performance. Data is collected from various companies at one time (year 2017). Cross sectional data of 63 companies have been used for the study. Microsoft excel & SPSS statistical packages were used to analyze the data.

Conceptual Framework

Table 01: Operational Definition of Variables

Concept Indicator Variable Measurement

Firm performance Return on Capital Employed ROCE Earnings before interest & tax/ ( Total Assets- Current Liabilities)

Corporate Governance Practices CEO Duality CEODUAL Coded : If 1 = CEO Duality, 0 = otherwise

Presence of Audit Committee AUDTC Coded: If 1= Presence of Audit Committee, 0 = otherwise

Auditors Opinion AUDITOPIN Coded: If 1 = Nonqualified opinion, 0= qualified opinion

Present of Remuneration Committee REMUNC Coded: If 1 = Presence of Remuneration Committee, 0 = otherwise

Variables

Based on the empirical studies variables are identified and the study contains the dependent & independent variables.

Dependent Variable

The dependent variable of the study is considered as the Return on Capital Employed. Since there is no exact definition for the measurement of the firm performance in empirical studies; out of various firm performance measurements such as Return on Equity (ROE), Return on Assets(ROA), Return on Capital Employed (ROCE) & Earning per Share (EPS); the ROCE is selected. ROCE calculated as Earnings before interest & Tax divided by the net assets i.e. Total assets minus current liabilities.

Independent Variable

Corporate Governance variables are defined as independent variables. In the study four corporate governance variables are considered. Those are CEO Duality, Presence of Audit Committee, Audit Opinion & Presence of Remuneration Committee. Since all four variables are qualitative in nature to enable the computation and statistical analysis the following variables are converted in to binary variables as shown in the Table 01.

  • CEO Duality
  • Presence of Audit Committee
  • Audit Opinion
  • Presence of Remuneration Committee

Hypothesis Development

H1 = CEO Duality is positively related to firm performance

H2= Presence of Audit Committee is positively related to firm performance

H3 =Non-qualified audit opinion is positively related to the firm performance

H4= Presence of Remuneration Committee is positively related to the firm performance.

Regression Model

This study employs the multiple linear regression analysis to examine the relationship between corporate governance variables and firm performance. The following equation model is use to test the hypothesis.

ROCE = a + β1 CEODUAL + β2 AUDTC + β3 AUDITOPIN + β4 REMUNC

Where

“ROCE” is Return on Capital Employed;

{ROCE = Earnings Before Interest & Tax/ (Total Assets- Current Liabilities)}

“CEODUAL” is separation of the role of CEO & Chairman;

“AUDTC” is Presence of Audit Committee;

“AUDITOPIN” is getting a nonqualified Audit Opinion;

“REMUNC” is presence of Remuneration Committee;

“a” is the co-efficient denoted by the all other corporate governance variables except the CEO Duality, Presence of Audit Committee, Presence of Remuneration committee & getting a non-qualified audit opinion.

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