Abstract:
Effective corporate governance leads the way towards aligning the interest
between managers and shareholders. Effectiveness of practicing the corporate
governance of companies in Sri Lanka is debatable topic due to the variation
between standard and actual practices. This study aims to examine the influence
of board diversity on agency costs of companies listed in Sri Lanka as proposed
by agency theory. The sample of this research consists of all companies listed
in Sri Lanka, exclusive of bank and financial institutions which are practicing
unique governance practices issued by Central Bank of Sri Lanka. The final sample
consists of 180 companies during the period from 2013 to 2019. This study
deployed panel regression analysis to test the relationship formulated in the
hypotheses by using the EViews 9 software. The results showed that the board
diversity-related variables such as separate leadership structure and presence
of non-executive director on companies’ board are appeared to have significant
influence on agency costs. Meanwhile, board size does not have direct impact on
agency costs. The findings of this study regarding board diversity and agency costs
have important managerial implications, that these findings are unlikely to the
prediction of agency theory and best practices. Agency theory is not applicable
to these companies, since the exiting corporate governance practices increase
agency costs. The potential benefits of this study led to re-think the board of
directors of the companies, managers, shareholder and the policymakers to
re-organise the implementation of best practices.
