The Influence of Sustainability Reporting on Firms' Financial Performance with the Moderating Role of Board Independence: Empirical Evidence form Sri Lankan Listed Firms

  • ,Department of Accounting and Finance
  • T.D.S.H Dissanayake , Rajarata University of Sri Lanka (sulo.hiranthi@gmail.com )
  • Roshan Ajward ,University of Sri Jayewardenepura (ajward@sjp.ac.lk )

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 issues. Consequently, 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.
Therefore, board governance practices (particularly independence of the board)
have been highlighted for its paramount importance. 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.

Key Words: Sustainability Reporting, Global Reporting Initiative, Board
Independence, Corporate Performance

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