The Role of Corporate Governance in Managing Insolvency Risk in the Post-Pandemic Era: An Empirical Study of Licensed Finance Companies in Sri Lanka

This study aims to identify the specific corporate governance (CG) factors that influence the probability of insolvency of the Licensed Finance Companies (LFCs) listed on the Colombo Stock Exchange (CSE) in Sri Lanka. The study is grounded in the evidence that CG is critical in managing insolvency risk, especially during the pandemic. The increasing financial instability among Finance Companies (FCs) highlights the crucial need for a comprehensive analysis of CG mechanisms and their impact on insolvency risk (IR). Specifically, the economic instability caused by the recent pandemic underscores the urgent need for such analysis. The sample comprised 25 LFCs listed on the CSE from 2019 to 2023. IR was measured using Altman's emerging-market Z-score (EMZ score). Panel regression and multinomial logistic regression analysis were employed to explore the impact of CG on the likelihood of insolvency risk. Key findings reveal that board gender diversity and the frequency of board meetings are significantly and inversely related to insolvency risk. Specifically, women on boards and the active engagement of audit committees contribute substantially to reducing insolvency risk. These findings highlight that organizations prioritizing gender diversity, ensuring regular board meetings, and fostering active audit committee engagement are more likely to enhance organizational stability and reduce excessive risk-taking behaviours. The study suggests that fostering diversity, inclusivity in leadership, and strong CG mechanisms contribute to long-term organizational sustainability and success in managing insolvency risk.