AN EXAMINATION OF RELATIONSHIP BETWEEN BOARD STRUCTURE AND FIRM VALUE: A SRI LANKAN EXPERIENCE

Abstract

The purpose of the study is to examine the nature of relationship between the structure of board of directors and firm value.  The basic question addressed here in this study is whether board of directors, as a control device, helps enhance the value of firm, as anticipated in good corporate governance systems (Nikomborirak, 2001,Munich, 1998). The study sample consists of 201 out of 239 companies listed in the Colombo Stock Exchange at the end of the year 2005.  Relevant data is gathered using a questionnaire survey and from company annual reports. Descriptive statistics and on-parametric statistics are used in data analysis.  Further, companies are grouped as large, medium and small sizes in terms of sales turnover. The results highlight there is a significant negative correlation between board size and Net Asset Turnover (NAT). Similarly it finds that large board of directors also negatively correlate with Tobin’s Q and EBIT (Earnings Before Interest and Tax) and existence of large number of non-executive directors on the board and the separation of office of CEO from that of chairman also results negative relations with the value of firm. On the contrary, it shows a positive association of CEOs shareholding with the firm’s value even though the relationship is not statistically significant. Hence, further studies are needed to examine as to what changes are required and how the effectiveness of the board conduct and its can be improved to enhance the firm’s value through good corporate governance.

Keywords: Board of Direction, Non-Executive Direction, Corporate Governance, Company Performance, Separation of Ownership

For full paper: fmscresearch@sjp.ac.lk