Abstract:
Despite the enormous attention that corporate governance received following a series of corporate
scandals, the effectiveness of prevailing governance best practices in achieving intended objectives
remains a puzzle. Therefore, this study assesses the association between corporate governance and
stock returns using the data on a sample of 100 firms listed in the Colombo Stock Exchange for the five
years from 2016 to 2020. Four corporate governance sub-indices were formulated to measure the level
of corporate governance compliance by classifying 18 board-related best practices into four sub indices where each best practice is given the same weight. Capital gain, dividend, and total stock
return were used as proxies for stock return. A series of random-effects panel regression models used
in this study to analyse the data did not show adequate evidence to claim a positive association
between stock return and corporate governance compliance. Only the basic board-related best
practices show a weak positive impact on stock return. The main reason behind this finding could be
the concentrated and family ownership structure prevailing in a large number of smaller firms in Sri
Lanka. More precisely, the Sri Lankan firms have maintained satisfactory levels of stock return even
when they do not comply with the corporate governance best practices. These findings highlight the
necessity of formulating contextually relevant best practices instead of encouraging firms to comply
with practices deemed best in developed markets.
