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Does Board Independence Moderate the Association between Sustainability Reporting on Performance Empirical Evidence from Sri Lankan Non-Financial Listed Firms

  • Ms. Dilini Dissanayake ,Senior Lecturer ,Department of Accounting and Finance ,Faculty of Business
  • T. D. S. H. Dissanayake ,Rajarata University of Sri Lanka
  • Dr. Roshan Ajward ,University of Sri Jayewardenepura
Abstract

Sustainability Reporting has gained prominence from the industrial developments in 1980s. One of the outcomes of industrial developments has been emergence of the link between economy, ethics and politics as well as an interaction between economic issues and moral and social values As a result of that, managers of the business entities no longer purely focus on higher productivity, but also pay their attention on numerous environmental, ethical, social and cultural issues, and board governance practices (particularly independence of the board) has been highlighted for its paramount importance. With this contemporary importance and dearth of studies of this nature in the local context, this study aimed to investigate the link between sustainability reporting on the firms’ performance with the moderating role of board independence. Accordingly, the first objective of the study was to examine the direct impact of the sustainability reporting on firms’ financial performance and secondly, to examine the moderating impact of board independence towards this association between sustainability reporting on firms’ financial performance. All the non-financial companies in the Colombo Stock Exchange were selected amounting to 174 for a four years period (2014 to 2017) and thereby six hundred ninety-six (696) firm-year observations have been used in the study. Using the Global Reporting Initiative (GRI) based index for measuring sustainability disclosures, it was found via the pooled OLS regression and panel regression analyses that such sustainability disclosures have a significant (p<0.01) positive association on firm financial performance. Furthermore, the results of panel regression analysis also indicated that greater availability of independent directors positively (p<0.05) moderated the relationship between sustainability disclosures and financial performance of firms, and this finding is consistent with the agency theory, which posits that a more independent board of directors can better monitor the firms due to their independency. This study contributes to the literature by showing such a moderating impact. Furthermore, this study offers insights to policymakers on enhancing their monitoring.

Keywords—Sustainability reporting, board independence

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