Corporate Governance and Corporate Profitability: Empirical Study of Listed Land and Property Companies in Sri Lanka

Corporate governance is concerned with ways in which all parties interested in the wellbeing of the organization attempt to ensure that mangers and other insiders take measures or adopt mechanisms that safeguard the interests of the stakeholders.. The purpose of the study is to find out the impact of corporate governance on profitability of listed Land and Property companies in Sri Lanka. Return of Assets is used as dependent variable. To measure the corporate governance, Board size, Board composition and independent directors of Remuneration committee. number of auditors are considered in this study. Firm size was considered as control variable in this study. The data were collected from firms’ annual financial reports and Data Stream over the period of 2011to 2016, from the CSE website. Descriptive statistics, correlation analysis, multiple linear regression analysis were used to analyse the data and examine the hypotheses by using the E-views 10 version, in this study. The findings revealed that there is a positive and significant relationship between ROA with auditors, board composition. Independent directors of Remuneration committee and board size are insignificantly correlated with ROA. Furthermore, it was found that the control variable (firm size) was insignificant in influencing firm performance (ROA)..This study provides useful information for policy makers, regulators in improving the corporate governance policies in the future and also helps in increasing and understanding the relationship between corporate governance and firm’s performance.


INTRODUCTION
"Corporate governance" first came into vogue in the 1970s in the United States. Within 25 years corporate governance had become the subject of debate worldwide by academics, regulators, executives and investors (Cheffins, 2012). Corporate governance is the means by which a company is operated and controlled. The aim of corporate governance initiatives is to ensure that companies are run well in the interest of their shareholders and the wider community (ACCA, 2016). Corporate governance generally refers to the set of mechanisms that influence the decisions made by managers when there is a separation of ownership and control. The governance mechanisms of modern corporations are of interest to investors, business practitioners, regulators, and scholars. These mechanisms can be broadly classified as internal and external. Internal governance mechanisms in developed market economies focus on the role and functions of ownership structure, boards of directors, Chief Executive officer (CEO) duality, individualand institutional shareholders, activist stock ownership and directors and executive compensation. External governance mechanisms concern the effectiveness of the managerial labour market, the market for corporate control, and government regulations. (Wu et al, 2002;Sahaet al, 2018;David, 2005 ;).
The issue of corporate governance has become essential in the present situation because of increasing fraudulent activities, agency conflicts and insider trading which weaken the corporate performance (Enobakhare, 2010). Good corporate governance practices are important in reducing risk for investors; attracting investment capital and improving the performance of companies (Velnampy&Pratheepkanth, 2012). Brownand Caylor(2004) found that better-governed firms are relatively more profitable, more valuable, and pay out more cash to their shareholders. Organized corporate governance helps to economic stability by upgrading the performance of organizations and expanding their right to gain entrance to outside capital Shahzad et al (2015). Shleifer and Vishnvy (1997) defined corporate governance as a way in which suppliers of finance to corporations assure themselves of getting a return on their investment. Irrespective of the particular definition, the importance of corporate governance arises in a firm because of the separation between those who control and these who own the residual claims (Epps and Cereola, 2008).
Brown andCaylor(2004) point out that, regulators and governance advocates argue on the stock price collapse of such former corporate stalwarts as Adelphia, Enron, Parmalat, Tyco, and WorldCom was due in large part to poor governance. If their contentions are valid, a market premium should exist for relatively well-governed firms.
The study attempts to ascertain and establish whether there are significant impacts of corporate governance on firm performanceof Listed Land and Property companies in Sri Lanka.

PROBLEM STATEMENT
The impact of corporate governance on firm performance has been a subject of great empirical investigations in finance. Most empirical research has focused on the impact of corporate governance on performance. Furthermore, finance decisions are associated with the agency costs and corporate governance mechanisms. In the present study, the corporate governance and corporate profitability of the land and property companies in Colombo stock exchange (CSE) has been investigated. Several research were undertaken to ascertain how corporate governance has an impact on dividend decision, Capital structure and performance. Several researches have expressed their findings as to how corporate governance had an impact on corporate performance, corporate profitability and firm's value. However such research are rarely carried out in Sri Lanka. No such study has been conducted to investigate between corporate governance and corporate profitability. Therefore the research problem could be stated as follows. "To what extent the corporate governance have significant impact on firm performance".

OBJECTIVE
The objective of this study is to find out the impact of corporate governance on performance of Listed Land and Property Companies in Colombo Stock Exchange.

SIGNIFICANCE OF THE STUDY
This study is important for the investors to obtain knowledge about mechanism of the corporate governance adopted by their portfolio companies. Furthermore, it provides the opportunities for academics and researchers to study the evidence of whether or not the corporate governance affects the performance of Listed Land and Property Companies in Sri Lanka.

DATA COLLECTION AND SAMPLING
There are 19 companies that are listed on Land and Property sector on Colombo Stock Exchange. This was incorporated as the Population for this study. Among them 17 firms were used as the sample. The research is based on secondary data which gathered from firms' annual financial reports and data stream over the period 2011to 2016, from the Colombo Stock Exchange(CSE) website .The analysis is based on panel data, by using software package of E-views.

LITERATURE REVIEW EMPIRICAL EVIDENCE ON CORPORATE GOVERNANCE AND PROFITABILITY/PERFORMANCE
The concept of corporate governance has been viewed by number of authors and scholars. For instance,David et al (2012) investigated the influence of corporate governance on financial firms' performance during the 2007-2008 financial crisis. In his study, they were using a unique dataset of 296 financial firms from 30 countries that were at the center of the crisis, they found that firms with more independent boards and higher institutional ownership experienced worse stock returns during the crisis period by using regression model. Sahaet al (2018) carried out study to explore the relationship between corporate governance and firm performance with considering the role of board and audit committee using secondary data for the period of 5 years ranging from 2013 to 2017. 81 listed companies in Dhaka Stock Exchange(DSE)were used as sample and the multiple liner regression analysis was used as underlying statistical test. The results of the study signify that board independence ratio and audit committee is statistically significant and has positive impact on Return on Asset (ROA) and Tobin's Q (TQ). But it is not statisticallysignificant in the case of firm performance indicator Return on Equity (ROE) in this study. In addition to this, board size is not statistically significant and has negative correlation with firm performance due togroup dynamics, communication gaps and indecisiveness of larger groups.
According to Velnampy and Pratheepkanth (2013), there is an impact of corporate governance on ROE and ROA. For their study, they used board structure and corporate report to measure the corporate governance whereas returns on assets, return on equity and net profit were used to measure the firm's performance.The data of ten manufacturing companies in Sri Lanka representing the period of 2006 to 2010 were used for the study. The multiple regression analysis was applied to test the impact of corporate governance on firm performance. Further their study found a positive relationship between the variables of corporate governance and firm's performance.
In one study, Tomar&Bino(2012)expressed the relation between corporate governance and bank performance by using a sample of 14 banks listed on Amman Stock Exchange market over the period 1997 to 2006, and their findings revealed that ownership structure and board composition have a strong impact on the bank performance and board size has no effect on bank's performance. Wu et al (2002) disclose that ownership concentration and percentage of employees' shareholding have positive impacts on firm performance but the percentage of major officers' shareholding does not. The ratio of insider directors is not related to firm performance either. CEO duality has an impact on chairmen's salaries. However, managerial compensation is, in general, not related to firm performance. Ibrahim et al (2010) stress that the impact of corporate governance on firm performance. The ROA and ROE are selected as firm's performance variables for this study. The data of corporate governance and the profitability variables were collected from two manufacturing sectors (Chemical and Pharmaceutical) of Pakistan from 2005 to 2009. The findings of this context is that there is a significant impact of corporate governance on ROE while insignificant on ROA. In sector wise analysis, there is an insignificant impact on pharmaceutical sector's profitability and chemical sector ROA. Whereas there is a significant impact of corporate governance on chemical sector ROE. Shahzad et al (2015), identify the relation among three corporate governance instruments (Board Size, Board Composition and CEO-Status) and one firm performance is measured using ROA Karachi Stock Exchange listed cement firms is observed for the period 2007-2013. Findings of the study was that there is a positive and significant relationship between ROA with board size and negative significant relationship between ROA with CEO-Status. Furthermore insignificant relationship between ROA with board composition by applying the ADFtest multiple regression and T-test exploration.
Bhagat&Bolton(2008) make three additional contribution to the literature, first one is that, stock ownership of board members, and CEO-Chair separation is significantly positively correlated with better contemporaneous and subsequent operating performance. Second, none of the governance measures are correlated with future stock market performance. Third, given poor firm performance, the probability of disciplinary management turnover is positively correlated with stock ownership of board members, and board independence. Velnampy  Faizul and Thankom (2016) investigate the influence of firmlevel corporate governance on financial performance of the listed firms in Bangladesh. Agency theory suggests that better corporate governance reduces expropriation costs, which, in turn, enhances investors' confidence in the firm's future cash flow and growth prospects, leading to higher firm valuation. Likewise, a decrease in private benefits is likely to cause an improved operating performance. This research uses a questionnaire survey-based corporate governance index (CGI), comprising of the three dimensions -shareholder rights, independence and responsibilities of the board and management, and financial reporting and disclosures. The study results partly confirm the prediction of the agency theory, with a statistically significant positive relationship between a firm's corporate governance quality and its valuation, even though the relationship between firm level corporate governance and operating performance seems inconclusive.
Simon & Enoghayinagbon (2014) examine the relationship between corporate governance and financial performance of randomly selected quoted firms in Nigeria. It investigates corporate governance variables and analyses whether they have an impact on firm performance as measured by return on asset (ROA) and profit margin (PM). Four corporate governance variables were selected namely: composition of board member, board size, CEO status and ownership concentration which served as the independent variables. The ordinary least square regression was used to estimate the relationship between corporate governance and firm performance. Findings of the study show that there is a positive and significant relationship between composition of board member and board size as independent variables and firm performance. CEO status also has positive relationship with firm performance but insignificant at P<0.05. However, ownership concentration has negative relationships with return on asset (ROA) but positive relationship with profit margin (PM). The relationships are not significant at 5%. The study recommends among other things that companies' board should be majorly dominated by independent directors and board size should be in line with corporate size and activities.
Puwanenthiren Mwangi (2012) investigated the effects of corporate governance on the financial performance of listed companies at (NSE). Specifically, this study examined board size, board composition, CEO duality and leverage and how they affect the financial performance of listed Companies at National Stock Exchange of India Limited (NSE). Firm performance was measured using Return on Assets (ROA) and Return on Equity (ROE). Data was analyzed using a multiple linear regression model. The study found that a strong relationship exist between the corporate governance practices under study and the firms' financial performance. There was a positive relationship between board composition and firm financial performance. However, the most critical aspect of board composition was the experience, skills and expertise of the board members as opposed to whether they were executive or non-executive directors. Similarly, leverage was found to positively affect financial performance of insurance firms listed at the NSE. On CEO duality, the study found that separation of the role of CEO and chair positively influenced the financial performance of listed firms International Journal of Trend in Scientific Research and Development (IJTSRD) @ www.ijtsrd.com eISSN: 2456-6470 @ IJTSRD | Unique Reference Paper ID -IJTSRD20309 | Volume -3 | Issue -2 | Jan-Feb 2019 Page: 278 THE CONCEPTUAL FRAME WORK The following conceptual model has been developed to show the relationship between corporate governance and firm performance.

Source: Developed by Researcher
Conceptual model shows that corporate governance is independent variable corporate performance is dependent variable.

Definition of variables
The following table shows the corporate governance variables and their description in this context.

Control Variables FSIZ
Firm size The natural log of the total assets.

HYPOTHESIS OF THE STUDY
For the study, following hypothesis were formulated in order to examine the relationship between the variables, based on the theory, and previous studies outlined.

Hypothesis1:
The corporate governance significantly impact on profitability and which measured by using ROA.  Table 2 presents descriptive statistics for the variables used in the analysis for this pooled sample. The pooled mean (median) return on assets (ROA) is 5.050843 (5.55948) respectively. The average auditor size is 3.07 (the median is 3). The average board size is 8.42 (the median is 8.5) also board composition have an average of 2.52 (median 3) and the independent directors of remuneration committee has an average value of 2.51 and the median is 3. With respect to the control variables included in this model, average size of the sample firms measured by real sales is about 3.09E+09 (1.22E+09)LKR.

EMPIRICAL RESULTSOF THIS STUDY Descriptive Statistics
These summary statistics indicate that the sample used in this study is comparable to those used in prior research in the Context of Sri Lanka.

Multicolinearity test
Multicolinearity can be measured using Variance Inflation Factor (VIF) or Tolerance test. In this study, VIF was used. According to the Table 2 VIF values are below 10 and where VIF values are less than 10 then there is no any issue on multi-co linearity.

Correlation Analysis
To find out the relationship among variables, correlation analysis was carried out. The summary of the results are presented in the Table 4.  Table 4 reports the Pearson correlation coefficients between variables. Auditors size (AUD), board composition (BCOM) shows a positive and statistically significant correlation with firms' performance measured by both ROA. This result is consistent with the hypothesis. Turning to control variables, firm size (FSIZ) has an insignificant positive correlation with measures of performance. Furthermore, table 4 suggests that the observed correlation coefficients between independent variables are relatively low, multicollinearity is not a serious issue in this study.  Table 5 Durbin Watson stat value is1.723731. This value which is less than 3 indicates that there are no auto correlation issues.

CONCLUSION
This study examined the impact of corporate governance on profitability of Listed Land and Property Companies in Sri Lanka. This study shows that the Auditors and Board composition significantly impact on profitability. Remuneration independent and firm size does not significantly impact on profitability. R square shows that the model explained 23.6330% of total variations of the dependent variable. It means that 23.6330% of the changes in dependent variable are described by both independent and control variables. The research was carried out by using the data over the period 2011to 2016, and only the firms in Colombo Stock Exchange (CSE) operating in the Land and Property sector were included. In future study different sectors may be analysed. There is a scope of further research to examine the impact of corporate governance mechanisms subject to diverse social and environmental agency issues and their market valuations.