Dynamic effect of corporate governance on financing decisions: Evidence from Sri Lanka

This study investigates the role of corporate governance in influencing the debt financing decision of 198 non-financial listed companies in Sri Lanka from 2009 to 2016. Sri Lanka’s corporate governance (CG) code promotes dispersed ownerships, larger board size and balance of power and authority through various means, such as exclusivity between the Chief Executive Officer and Chairperson and the independent Board composition. This study tests the role of CG through four indicators while controlling for other firm-specific variables. Results of the two-step system Generalized Method of Moments on a balance panel data shows that the effect of CG indicators on financing decision depends on the financing terms. In general, the influence of CG indicators is significant on the two debt financing measurements, except for managerial ownership when investments in assets are involved. This influence appears eminent in predicting the debt ratio, although the effect is not necessarily consistent with the hypotheses. The latest revision on CG codes of best practices has also improved firms’ access to debt financing, except for raising long-term debt to acquire assets. Results imply that the Sri Lankan firms adopting the CG best practices would need to rely on other factors to access long-term debt financing or on other external financing sources.