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EXAMINING CORPORATE OWNERSHIP AND RISK 
MANAGEMENT IN SRI LANKAN FIRMS 

 
 

1Dr. Anika Perera and 2Prof. Nishan Silva 
1Assistant Lecturer, Department of Accountancy, Sri Lanka Institute of Advanced Technological 

Education 
2Professor in Finance, Faculty of Management and Finance, University of Colombo, 

 
Abstract: Corporate governance plays a pivotal role in mitigating corporate scandals and financial 
crises that have plagued global economies in recent years. Numerous large companies across the 
globe, including those in the United States, Europe, and Asia, faced collapse during financial crises, 
highlighting the importance of effective corporate risk governance. In Sri Lanka, similar business 
catastrophes occurred primarily in the Banking and Finance Industry between the late 1980s and the 
early 2000s. 
Corporate governance measures, such as board structure, compensation structure, and ownership 
structure, significantly influence a firm's risk profile, cash flows, size, and regulatory compliance. 
Ownership structures, in particular, play a crucial role in resolving or exacerbating agency conflicts 
within firms. Risk and performance are intertwined, leading owners to seek the balance between 
managing risk and achieving financial success. 
In response to these crises, countries like the UK and the USA have initiated regulatory frameworks 
emphasizing the role of corporate governance and risk management. These frameworks offer 
guidance on internal control mechanisms and board attributes to enhance corporate accountability 
and reduce the risk of firm insolvency. 
However, many Asian countries, including Sri Lanka, have yet to implement regulatory frameworks 
addressing the role of boards in risk management. This study explores the relationship between 
ownership structures and corporate risk-taking, shedding light on the significance of ownership in 
shaping a firm's approach to risk management. 
Keywords: corporate governance, ownership structure, risk management, financial crisis, 
regulatory framework 
 
 
1. Introduction  
The necessity of corporate governance became very crucial with many corporate scandals and financial 
crisis took place around the world in recent times (Kaur & Gill 2008). A number of large American, 
European and Asian companies collapsed during the financial crisis that took place all over the world 
(Wei &Geng, 2008). In Sri Lankan perspective, business catastrophes took place in the late 1980s and 
in the early 1990s through to 2008, especially in the Banking and Finance Industry (Heenetigala, 2011; 
Mapita et al., 2015). Researchers connected the reason for the corporate collapses and financial crisis 
are failure of effective adaptation of corporate risk governance. As per Jensen and Meckling (1976) 

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corporate governance measures like board structure, compensation structure and ownership structure 
determines the risk, cash flows, firms‟ size and regulations of the firm and further they argued that 
these variables have strong influence on the firm‟s risk. Further, they explicit that different ownership 
structures have different implications according to their tendency to resolve or aggravate agency 
conflicts. Risk and performance like two side of the coin, hence owners tend to avoid risk part and seek 
the other side which is main reason for the risk governance to the corporate board. From the impact of 
crisis and collapse UK has been initiated the regulatory framework with the concern on the role of 
corporate governance and risk management published in Financial Reporting Council (FRC,2011) 
under Boards and Risk. Simultaneously, In USA, corporate governance reforms which form part of the 
Sarbanes–Oxley Act (2002) provide specific guidance on internal control mechanisms and board 
attributes to improve corporate accountability and reduce the risk of firm insolvency. However, no any 
regulatory framework has been initiated in Asian countries perspectives including Sri Lanka with shade 
of Boards and Risk. Shareholders are the owners of corporations (Monks & Minow 1995) and they are 
different types (Connelly et al. 2010) such as individual, family, state, and professional, government, 
foreign and public (La Porta, De Silanes & Shleifer ,1999; Gollakota& Gupta, 2006). Owner structure 
directly influence on the firm risk. Ownership structure has been identified as an important factor in 
shaping corporate risk taking (Amihud & Lev, 1981; May, 1995; Boubakri et al., 2013).   
However, the relationship between ownership structure and corporate risk taking remains unexplored 
in Sri Lankan perspective. Senaratne and Gunaratne (2008) found that ownership is concentrated in 
most Sri Lankan listed companies with the presence of controlling shareholders. As per them, 
Concentrated ownership, Institutional ownership and Executive (Management ownership) are the 
main elements for Sri Lankan companies, however the impact of concentrated ownership with firm‟s 
risk remain unexplored. This study sheds on the light on gap, and examine of empirical study on 
ownership structure and firm risk. The next section of the paper discusses the literature related to 
ownership type and risk of firm. Then the hypotheses are developed and the theoretical framework is 
presented. Next, the methodology is outlined after in which the analysis and discussion of findings are 
presented. This is followed by the conclusions of the study with implications and suggestions for future 
research.   
2. Review of Literatures and Hypothesis development  
An owner called “principal” is the shareholder who invested with the view of profit and “Agent” who 
has been appointed by principal to act on behalf, this is agency theory, advanced by Jensen and 
Meckling (1976). These two parties have incongruence interest; due to that agency cost arises. Agency 
cost is an economic phenomenon concerning the fee to a „principal‟ when the principal chooses or hires 
an „agent‟ to act on its behalf (Jensen & Meckling,1976). Agency theory in the viewpoint of ownership 
structure and firm risk is first developed by Berle and Means (1932) and then theorized by Monsen and 
Downs (1965) and Monsen et al., (1968). They argue that principalagent separation leaves possibility 
for conflicting goals to arise. In terms of risk-taking, owner takes greater incentives and rewards than 
the managers do and therefore favor riskier projects to maximize the value rooted in their equity 
holding. Conversely, managers often have both the preference and incentive to pursue strategies and 
practices that benefit themselves at the expense of shareholders. Managers may engage in short-run 
cost augmenting activities to enhance their non- salary income and/or they may indulge their need for 

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power, prestige, and status by attempting to maximize corporate size and growth rather than corporate 
profits (Chun. S & Lee. M, 2017). Obviously, As per Fama (1980) managers will choose to invest in less 
risky investment to protect their employability in the firm. Thus, managers may pursue non-value-
maximizing strategies unless they have proper incentives or face appropriate pressure such as pressures 
from director board. Therefore, Agency theory clearly defines the association with the ownership 
structure and firm risk seeking behavior. There are many studies available to depict the relationship 
between institutional ownership, management ownership and concentrated ownership structure and 
risk of the firm which are outlined below.   
2.1 Management Ownership and firm risk  
Management ownership structure means the equity holding percentage by the executives of the board. 
The executive directors‟ ownership is measured as the percentage of equity hold by all the executive 
directors/Management on the board which include voting rights and capital percentage. The voting 
rights that come with holding equity in the firm make directors with large holdings of firm equity have 
the ability to influence decisions. Board members with large ownership cannot be easily discharged 
because they have voting rights and this influence can keep them in their jobs (Wright et al., 1996). 
Executive directors are compensated in terms of equity, as well as salary, whereas NEDs are 
compensated with director fees for their work and may be compensated with firm equity. This is where 
executives owning shares. To align the interests of the executive directors with the shareholders who 
want maximum returns, they are compensated with firm equity. Agency theorists believe that directors 
having ownership in the firm can influence them to maximize returns on shares and reduce agency 
costs (Jensen and Meckling, 1976). More ownership in the capital would encourage directors to invest 
in more value enhancing activities which ultimately go with risky project (Jenkins and Seiler, 1990). 
Hitt, Hoskisson and Ireland (1994) states that rewarding to managers with firm equity, would help 
them to invest in initiatives that increase the long-term value of the firm. CEOs with greater 
stockholdings may have stronger incentives to take risky projects, suggesting that there may be a 
positive association between CEO ownership and performance variability (Cheng, 2007).Wright et al. 
(1996) find positive relation between equity ownership and firm risk when executives hold low equity 
investment whereas, the relationship shows negative when management‟s investment is high. Further, 
they explicate that investors desire growth oriented risk taking whereas some situation investor want 
to reduce risk in order to protect the investment. Board of directors are making financial decision 
whether to go with risky project or not mainly because of their wealth portfolio. The benefits and costs 
because of their position and the potential for entrenchment. If the board member‟s invested mainly 
in the firm, then they may try to minimize risk by avoiding riskier projects (Wright et al., 1996). Most 
of the risk related literature consist the positive relation between managerial ownership and managerial 
risk-taking. Some studies are highlighted here.   
Laeven and Levine (2009) did study with bank sample and find that, if there are powerful owners, they 
prefer to face high risk, in addition to this, they find that large executive equity owners have stronger 
inducement for risk than non-shareholding executives. In another study, CEOs have a high proportion 
of investment in equity reveal high performance (Sanders & Hambrick, 2007). On the other hand, some 
line of studies shows if compensation is more sensitive with stock return volatility, then executives tend 
to avoid risky projects in order to avoid high risk and claims for compensation. (Coles, Daniel, & 

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Naveen, 2006). No studies were found that associated board executive equity ownership to firm risk 
using a Sri Lankan-based data sample. The literature mostly supports the view that equity ownership 
by executive directors will be positively related to firm risk. Therefore this hypothesis as follows: H1: 
Management shareholding is positively related to firm risk    
2.2 Institutional owners and firm risk   
One of the important issues emerging from the recent financial crisis is the alleged negative role played 
by institutional investors leading up to and during the crisis period. Some researchers preserve that 
institutional investors exacerbated the crisis by pressuring financial institutions for short-term profits 
and increasing the risk-taking behavior (Callen & Fang, 2013).  Institutional investors can be any entity 
such as a mutual fund, pension fund, and investment bank, insurance company or any other company 
that has a large amount of money to invest. These firms can be very knowledgeable about the firms they 
invest in and can have a strong voice to influence decisions owing to the percentage of stock held in the 
firm (Sudha et al., 2016). Institutional investor could be in two category one is monitoring institutional 
investors and other one is short-termism institutional investors. Monitoring institutional investors, by 
virtue of their large shareholdings, have the incentive to collect information and monitor management 
because they reap greater benefits than smaller investors from monitoring the organization such as firm 
growth, R&D investment, executive compensation, management (earnings forecast) disclosures, CEO 
turnover, antitakeover amendments, and corporate governance (Callen & Fang ,2013). Actually, prior 
studies provides experimental indication of this „„short-termism‟‟ view. This proof suggests that 
institutional investors trade heavily based on current earnings news, place excessive emphasis on short-
term performance, and fail to serve as monitors in correcting CEO over compensation (Cheng et al., 
2010; Cella et al., 2011).   
Most of Agency theorists predict that institutional investors having substantial holdings of equity in a 
firm will monitor management to protect their investment and ensure a good return (Monks and 
Minow, 1995). But, Cheng et al. (2011) find that institutional investors may be interested in short-term 
profits and, therefore, encourage managers‟ risk-taking behavior. Wright et al. (1996) and Hutchinson 
et al. (2015) find that these investors may encourage boards to take higher risks to achieve higher 
returns. Callen and Fang (2013) also shows that temporary institutional investor ownership increases 
the firm risk. According to Manconi and Yasuda (2012), one of the motives for this behavior can be the 
cost of monitoring management because of which the institutional investor would opt to sell the stock. 
The recent literature mostly supports the positive relationship between the percentage of substantial 
institutional holdings and firm risk. Based on the empirical finding and theoretical support, it assumes 
to be positive association with firm risk.  To test the above argument in Sri Lankan context, the below 
hypothesis developed,  H2: The percentage of substantial holding by institutional investors is positively 
related to firm risk  
2.3 Concentrated Ownership and firm risk  
Jensen and Meckling (1976) argue that large concentrated shareholders can have an impact on 
corporate risk taking. La Porta et al. (2000) express that the concentrated ownership structure of large 
firms in emerging countries is known as the root cause of agency conflicts in the firm. Jensen and 
Meckling(1976) argue that representatives of majority shareholders could motivating for higher 
performance because it eradicate agency problems between the principal and the agents. Concentrated 

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ownership is uncommon in UK and USA on the other hand European countries as well as in Latin 
America, Southeast Asia and Africa; firms are typically controlled by few powerful investors (Wei 
&Geng 2008). In developing countries, stake holding is also highly concentrated (La Porta et al. 2000). 
In most Sri Lankan listed companies ownership is concentrated in the hands of a controlling 
shareholder, who enjoys much higher controlling rights over cash flow and widely held entities are rare 
as in most other Asian countries (Senaratne & Gunaratne 2008; Mapita et al., 2015). Wright et al. 
(1996) argues that due to managerial significant effect, concentrated owners may protect the prevailing 
private privileges by taking a conventional approach to investment policy, because managers can 
engage in relationship-investment making their replacements difficult for outside investors. Gedajlovic 
and Shapiro (2002) and Hu and Izumida (2008) found that Japanese firms whose ownership structure 
is more concentrated deliver higher operating returns.  Claessens and Djankov (1999) demonstrate that 
these firms achieve a higher productivity. Shleifer and Vishny (1986) argue that large shareholders have 
the means to steer firms towards high-risk and highreturn projects.   
According to Hill and Snell (1989), large shareholders also dissuade firms from embarking on unrelated 
diversification strategies. As a result, firms with concentrated ownership remain more focused, which 
contributes to their higher performance, but also explains why they tend to display a higher 
idiosyncratic risk. This issue is potentially more severe in Sri Lanka with relatively less effective 
corporate governance system, which results in a lack of the mechanisms to constrain the private 
benefits of controlling shareholders and managers. The literature mostly supports the view that 
concentrated ownership will be positively related to firm risk. Therefore this hypothesis as follows. H3: 
Concentrated ownership is positively related to firm risk    
3. Methodology   
3.1 Sample Selection  
The population of the study is 293 companies listed in the Colombo Stock Exchange (CSE) representing 
twenty industry sectors. The sample is comprised of the 69 firms listed in the Colombo Stock Exchange 
for the 20102017 financial years. Banking and finance sector was omitted from the sample due to the 
fact that obeying to the Governance mechanisms is mandatory for Banking and Finance companies 
while for other companies is non mandatory. It is voluntary with several mandatory rules and also some 
companies were excluded due to data unavailability. Therefore to protect the consistency of the 
conditions under which the research is carried out companies from Banking and Finance sector was 
ignored from the sample. Data collection was mainly based on annual reports of the companies in the 
sample. The unit of analysis was a firm-year. The present study was based on secondary data, which is 
based on the published audited annual reports of the companies.  
3.2 Variables  
This section presents the dependent, independent, and control variables used in the econometric 
analysis.  
3.2.1 Independent Variable   
Ownership variable refer as independent variables such as institutional ownership (IO), managerial 
ownership (MO) and concentrated ownership (CO). Institutional ownership  is measured as the total 
percentage of substantial (greater than 3 per cent) ownership of equity in a firm by institutions such as 
pension funds, mutual funds, investment banks and companies (Callen & Fang, 2013; Sudha et al., 

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2016). Management‟s ownership is measured as the percentage of equity hold by all the executive 
directors on the board which include voting rights and capital percentage (Sanders & Hambrick, 2007; 
Coles et al., 2006 and Sudha et al., 2016). The concentrated ownership (CO) is measured by using the 
Herfindahl Index 5 (HI5). The first five largest shareholders and shareholding percentage are taken 
into consideration in the Herfindhal Index and got the squared sum of it (Nguyen, 2011; Khan, 2005)   
3.2.2 Dependent Variable  
This study determines firm risk as dependent variable and measures based on accounting, market and 
mix of tem.  In this study use the two folders of measurement using accounting and market data which 
ensures that the results of the study are robust. Firm risk measures used in this study are total risk, 
asset return risk and financial risk. Total Risk is measured by the standard deviation of the firm's daily 
stock returns for each fiscal year. It is measured as the standard deviation of the rate of return on equity 
for the company, and is expressed as a rate of return per month computed from the (continuously 
compounded) equity rates of return for the company's equity. The standard deviation is a measure of 
historical volatility, and is used by investors to gauge the amount of expected volatility. This measure 
encompasses both systematic and unsystematic risk. Total risk can be explained as the extent of the 
stock volatility and measured by previous studies as the standard deviation of equity returns for each 
fiscal year (Laeven & Levine, 2009; Wright et al., 1996; Hutchinson; 2001; Nguyen, 2011; Pathan, 2009; 
Sudha et al., 2016).  
The standard deviation of this ratio (Pit / Pit -1) times the square root of the number of days of trade 
activity (250 days) gives the annualized volatility of equity return for each stock. Asset return risk is 
used as an alternative risk measure which represents the variance of the asset returns. Following 
(Flannery & Rangan, 2008; Pathan, 2009; Sudha et al., 2016), volatility of asset returns or asset return 
risk will be computed as the ratio of market value of equity to market value of total assets times the 
standard deviation of the daily stock returns. This will be annualized by multiplying the resulting value 
by the square root of the approximate number of trading days in the year. Further, ARR is computed as 
the standard deviation of the daily stock returns times the ratio of market value of equity to market 
value of total assets times square-root of the approximate number of trading days in the year which is 
250. Financial risk which represents the accounting data used by (Eling & Malank, 2011).   
These are commonly used measures to assess firm risk. To measure, logarithm of the ratio of total assets 
to total shareholder equity is used. Total assets are defined as the sum of current and non-current 
assets. Total shareholder equity is composed of common equity, minority interest, and preferred equity.  
3.2.3 Control Variable  
There are some control variables used in this study that are considered to affect either the firm's risk 
taking or the measurement of that risk, such as firm size, Firm Performance and Leverage. Firm size is 
used to control for difference in size of the firms. Large size of the firm may have better access to capital 
markets and borrow at better conditions (Ferri and Jones, 1979), therefore large leverage firms would 
be able to diversify and invest more. Hence, it predicts that larger firms will be associated with less firm 
risk. Firm performance as a control variable, as it is possible that the firms change risk taken depending 
on the performance of the firm. If a firm does not meet the targeted firm performance in the prior year, 
managers in an attempt to meet targeted performance figures for the current year will take more risk 

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in terms of investment choices. Therefore, it is predicted that low performance of the prior year will be 
associated with higher firm risk.   
3.2.4 Definition of variables Table  
Table 01: Definition of variables 

Variables  Presign  Measures  Source  

Independent 
variables  

      

Management  
Ownership(MO)  

+  Equity ownership of all the executive 
board members as a  
percentage of the outstanding shares  

(Sanders&Hambrick, 2007; 
Coles et al.,  
2006 and Sudha et al., 2016)  

Institutional  
Ownership (IO)  

+  Percentage of total of substantial 
institutional investors holding more 
than 3% of shares in the firm  

(Callen & Fang, 2013; Sudha et 
al.,  
2016)  

Concentrated  
Ownership (CO)  

+  Herfindahl Index 5 (HI5). The first five 
largest shareholders and shareholding 
percentage. The Herfindhal Index and 
got the squared sum of it  

Nguyen, 2011; Khan, 2005  

Dependent 
Variable  

      

Total risk (TR)    The standard deviation of the daily 
stock returns in each year  

(Laeven&Levine, 2009; Wright 
et al., 1996, Hutchinson 
,2001;Nguyen, 2011;  
Pathan, 2009; Sudha et al., 2016)  

Asset  return  risk 
(ARR)  

  The standard deviation of the daily 
stock returns times the ratio of the 
market value of equity to market value 
of total assets times square root of 
trading days  

(Flannery &Rangan (2008); 
Pathan  
(2009) &Sudha et., al (2016)  

Financial Risk 
(FR)  

  Logarithm of the ratio of total 
investments to total shareholder 
equity  

(Eling&Malank ;2011).  

Control 
Variable  

      

Performance  -  The return on assets for the firm for the 
previous year  

(Cheng, 2008)  

Firm size  -  The natural logarithm of total assets  (Pathan,2009; Sudha et al., 
2016).  

Financial leverage  -  Total debt over assets  (Sudha et al., 2016)  

3.3 Regression Model   
The empirical model use to estimate the relationship between ownership structure and firm risk 
represented in below equation. Risk = β1+ β2 (Institutional Ownership)i,t+ β3 (Managerial 
Ownership)i,t+ β4 (Concentrated Ownership)i,t + β5(ROA)i,t+ β6(Size)i,t+ β7 (LEV)i,t + ε i,tWhere, ROA 
for performance, FZ is for firm size and LEV is financial leverage. i stands for the firm and varies from 

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1 to n; t is the year and varies from 2010 to 2017; β1 is the constant that does not vary over time; β1 to 
β7 are the coefficients in the regression; ε i,t it is the residual variable that varies with time; and natural 
log board size will be used.  
4. Results  
4.1 Descriptive Statistics  
Table 4.2 shows descriptive statistics of the study. Total Risk (TR) is 1.49 with the maximum value of 
7.64 and minimum value of 0.42. The average TR shows 1.49 which is more than 1 implies that Sri 
Lankan companies experience higher level of total risk. The mean value of the ARR is 1.96 with the 
maximum value of 43.97 and minimum value of 0.0008.  Standard deviation has recorded 3.58 
meanwhile average shows 1.96 which is more than one as a result TR is validated through ARR hence, 
both mean depicted the same trend. Financial risk (FR) represents the accounting data. The mean value 
of the FR is 1.16 with the maximum value of 20.01 and minimum value of 0.0005.  Standard deviation 
has recorded 1.75.  The average 1.16 shows that Sri Lankan companies are recorded the risk which is 
more than one. FR is calculated purely from the accounting data whereas TR calculated from the market 
data meanwhile ARR calculated with two folder coverage market and accounting data. From the 
summary descriptive statistics it confirms that listed companies in Sri Lanka shows TR, ARR and TR 
are positive at the same time mean value more than one. The mean MO of listed companies in Sri Lanka 
is 8percent which is greater than the UK results which is reported by (Sudha et al., 2016) and but it 
shows the more similar results to the Japan perspective (Sun, 2017).  The minimum MO reported is -
0.08 percent and maximum 70 percent and standard deviation shows 17.7 percent. The mean of IO 
shows 71 percent whereas this is very higher when compared to UK results which is 34.14 percent 
(Sudha et al., 2016) and Japan results which was 27.5 percent (Sun, 2017) at the same time standard 
deviation shows 27 percentage with the maximum of 99 percentage minimum of 0 percentage. The 
mean of CO shows 3333.6 which higher than the USA, Japan results. Standard deviation shows 2050 
whereas maximum reported 9222.3 and minimum reported 270.8.   
Variables   Mean   Median   Maximum   Minimum   Standard 

Deviation   
Dependent 
Variables   

     

Total Risk   1.49   1.25   7.64   0.42   0.74   
Asset Return Risk    1.96    0.92    43.97   0.0008    3.58   
Financial Risk   
Independent 
Variables   

 1.16    0.71    20.01   0.0005    1.75   

Management 
ownership %   

 0.08   0.003   0.70   -0.008   0.177   

Institutional 
ownership %   

0.71   0.82   0.99    0.00    0.27   

Concentrated 
ownership  Control 
Variables   

3336.2   2877.5   9222.3   270.8   2050.13   

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ROA (%)    0.07    0.05    0.72   -0.07    0.08   
Firm size (Ln)    22.42    22.33    26.34    18.23    1.49   
Leverage (Ratio)    0.16    0.13   0.74    0.00    0.14   

 Table 2: Descriptive Statistic   
4.2 Correlation  
Table 3 represents the Pearson‟s correlation for all the variables in the study. It examined the 
association between ownership variables and risk variables.  There is a positive correlation between 
management ownership and TR, at the same time management ownership shows negative relationship 
between ARR and FR. Institutional ownership reports negative relationship between TR, on the other 
hand shows positive association between ARR and FR.  There is a positive association between 
concentrated ownership and TR, by the way shows negative association between ARR and FR.  
Table 3: Correlation between variables  
  

 TR   ARR   FR   MO   IO   CO   ROA   FZ   LEV   
TR   1           
ARR   0.517*   1          
FR   0.164*   0.869*   1         
MO   0.073*   -0.031   -0.058   1        
IO   -0.067*   0.026   0.059   -0.62*   1       
CO   0.133*   -0.014   -0.066   -0.179*   0.329*   1      
ROA   -0.047   0.144*   0.266*   -0.094*   0.083*   0.05   1     
FZ   -

0.383*   
-0.24*   -0.145*   -0.101*   0.213*   -0.194*   -0.181*   1    

LEV   -0.227*   -0.195*   -0.16*   -0.054   -0.048   -0.232*   -0.287*   0.405*   1   
This table shows the Pearson‟s pair-wise correlation between all the independent and dependent 
variables used in the empirical model. *denotes that correlation is significant at the 0.05 level   

  
4.3 Regression Results and Discussion.   
The Table 4 depicts the results of estimation model 01, model 02 and model 03. The Hausman test 
rejects the validity of using the random effect model, so the estimation results of fixed effect models are 
presented. The pre-sign indicates the prediction as made in the hypotheses. Results revealed that the 
overall models are significant at 95% confidence interval level. R-squared value of all models around 
56 percent shows the amount of variation in the dependent variable is explained by the independent 
variables in the models. 
 
 
 
 
 
 

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 Table 4: Estimation Results of Determinants of firm risk and ownership structure  
  
Explanatory 
Variables   

Pre-sign   Total Risk (01)   Asset Return 
Risk(02)   

Financial 
Risk(03)   

Constant     11.435(7.240)***   50.326(7.064)***   19.991(5.738)***   
Management 
Ownership   

+   
-1.187(-2.770)***   -4.157(-2.150)**   -1.122(-1.1875)   

Institutional  
Ownership   

+   
0.059(0.229)   4.108(3.508)***   1.7706(3.0920)***   

Concentrated 
Ownership   

+   
0.00004(0.101)   0.0001(0.964)   0.0001(1.150)***   

ROA     -0.408(-0.858)   0.5015(0.2337)   1.4583(1.390)   
Firm size     -0.444(-6.063)***   -2.3635(-7.1500)***   -0.938(-5.805)***   
Leverage   
     

0.620(1.811)**   
  

1.498(0.970)   
  

0.392(0.519)   
  

R-squared    0.5065   0.5637   0.5663   
Adjusted R-
squared   

 0.4287   0.4949   0.4980   

F-statistic    6.5148   8.2008   8.2885   
Prob (F-statistic)    0.000   0.0000   0.0000   
No of firms    69   69   69   
No of observation    552   552   552   
Note: This table shows the results from the estimation of the empirical model using generalized least 
square–fixed effects method; the dependent variables of total risk, asset return risk and financial risk 
are used alternatively in the empirical model. The model fit is also reported; along with the coefficient 
the t-statistic is reported in parentheses; the superscripts of *, ** and **** statistical significance to 
10%, 5% and 1% respectively.   
As per the finding, it shows that management ownership is related negatively and significantly with risk 
variables measures such as total risk, asset return risk and financial risk. However, financial risk does 
not show significance association with management ownership. So, it shows the evidence to reject the 
hypothesis one (H1).Results depict that managers are expected to take less risk as their managerial 
ownership increases. This result shows contradicting finding with UK, US and Japan studies. In the UK 
studies, the results shows higher board executive equity ownership is related positively and significantly 
with total risk (Sudha et al., 2016), In line with this finding, Saunders et al. (1990) found that, in US 
banks where managers held a higher proportion of equity, there was significantly higher risk-taking 
behavior and Sun (2017) shows Managers ownership are positive and statistically significant 
association with firm‟s risk.   
It may be that executive directors with a higher proportion of investment have no incentive to increase 
firm risk to try and maximize returns for themselves, due to uncertainty of return and job security. It is 
found that the percentage of ownership held by institutional investors is positively and significantly 
related to both financial risk and asset return risk, but total risk also associated positively with 

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institutional owners with no significant relation. It shows the evidence to accept the hypothesis two 
(H2). This result confirms finding from past studies of (Callen & Fang, 2013; Cheng et al., 2011; 
Hutchinson et al., 2015). Further, finding confirm that institutional ownership is positively related with 
firm risk. The result shows of concentrated ownership with total risk, asset return risk and financial 
risk are positive. The finding shows significant positive association with financial risk. The results 
consistent with the finding of these studies, (Shleifer &Vishny, 1986; Wright et al., 1996). It may be 
large shareholders have the motivations and power to steer firms towards adopting value-enhancing 
strategies that are associated with higher risk. The control variables were significantly influence the 
firm risk (Firm size and leverage). Larger firms (Firm size) are associated significantly and negatively 
with total risk, asset return risk and financial risk. It may be for very large firms, a wrong choice in 
investment may not affect the stock price.    
Firms with higher financial leverage take less risk; this can be due to the fact that firms face the burden 
of repayment and, therefore, taking lesser risk in listed companies in Sri Lanka. Firm performance 
(ROA) shows negative association with total risk at the same time positive association with assets return 
risk and financial risk.  This finding aligns with the study of Sudha et al (2016) with UK sample. 
Therefore the ROA, Firm size and leverage significantly impact the risk of the companies listed in Sri 
Lanka.   
5. Conclusion  
This paper examines the relationship between ownership structures and firm risk in listed companies 
in Sri Lanka. Using panel date set of sixty nine companies over the sample period of 2010 to 2017. There 
are three types of ownership structures identified such as management ownership, institutional 
ownership and concentrated ownership which are the common features of Sri Lankan companies‟ 
ownership structure. The negative association was hypothesized between ownership structures and 
firm risk. The finding of the study reveals that the management ownership shows negative and 
significant association with firm risk which is the interesting and uncommon finding when compare 
with earliest literatures. On the other hand, institutional and concentrated ownership structures show 
positive relation with firm risk which is the similar finding and consistent with past studies on 
developed countries‟ sample. This finding emphzise that, the clear relation with ownership structures 
and risk taking abilities of companies in Sri Lanka. These finding highlights the optimal ownership 
structure to gear up the corporate performance via mitigate the corporate risk. By using this finding, 
policy makers and regulators could draw the attention of appropriate mix of ownership to prevent the 
financial humiliations in future. Nevertheless, this study has certain restrictions. The scope of the study 
was limited to 69 listed companies in Sri Lanka. Therefore, future researchers can expand the study by 
using a larger sample of companies. In addition, the current study used only an eight-year time span 
from 2010 to 2017, which can also be expanded. Further, this study eliminates companies in the 
banking and financial sectors like banks, finance companies, leasing companies, insurance companies, 
investment companies and fund management companies due to their unique corporate governance 
regulations. Therefore, it would be useful if future researchers undertake studies on those companies 
as well and focus on sector wise studies separately to further explore the relationships studied in this 
paper.   

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