Corporate Governance in Determining the Stock Price in Colombo Stock Exchange

Abstract

The impact of corporate governance on firm performance has become a topic of conversation. However there is less attention on how it impacts the share price. The purpose of the study is to determine the impact of corporate governance on the share price of companies listed in the Colombo Stock Exchange (CSE). The research designs, descriptive analysis, regression analysis and correlation analysis, were used in this study and it the period of financial year of 2015-16. A sample of 64 companies was chosen as representative of the population out of 296 companies listed on the Colombo Stock Exchange (CSE), excluding banking and finance sector and data was collected using secondary method. Compliance level of corporate governance have been measured by utilizing self-constructed Corporate Governance Index (CG Index) with five sub-indexes namely Board Structure (BS), CEO and Management(CEO), Transparency and Disclosure (TR), Investor Relation(IV) and CSR Disclosure(CSR). The index contains 40 criteria under the above Sub-Indexes. The study found that there is no significant relationship between overall CG index and the share price. However, transparency demonstrated a significant negative impact on the share price. When the overall sample was clustered in to sub samples as high, medium and low according to firm size, the medium sample demonstrated a significant positive relationship between CG index and the share price. The important key finding that was supported with enough evidence to show lowering the firm size the Board Structure (BS) and Investor Relation (IV) is significant to increase the share price. Unexpectedly Transparency (TR) demonstrated a significant negative impact for smaller firms. Further, it was found that the corporate governance practices generated a long term impact on share price since the same impact can be found in lead share price also.