The Impact of Firm-Specific and Macro-Economic Factors on Financial Performance: Evidence from Listed Finance Companies in Sri Lanka

Abstract

Introduction: Company performance plays an important role in national economic growth and employment creation in the country. Both macro and microeconomic factors influence a firm’s performance. This study seeks to examine the impact of firm-specific and macroeconomic factors on the financial performance of listed finance companies in Sri Lanka. It tries to find out the various factors which determine the company performance of listed finance companies.

Methodology: The study investigates the effect of the inflation rate, interest rate, and gross domestic product (GDP) growth rate, while the firm characteristics were firm size, leverage, and capital ratio. The dependent variable financial performance is measured as return on assets (ROA). The analytical approach involves employing panel data regression techniques using STATA. Data for analysis were sourced from company annual reports and Central Bank reports covering the period from 2014 to 2023 inclusive of both years. There are 35 CSE-listed entities under the diversified financial industry, out of which this study sample contained 33 entities.

Findings: According to the findings, the GDP growth rate and inflation rate had a positive and significant effect, while the interest rate had a positive but non-significant effect on the financial performance of listed finance companies in Sri Lanka. Second, the firm characteristics demonstrate that firm size had positive and significant effects on return on assets (ROA) while leverage had a negative significant effect on return on assets (ROA).

Conclusion: This research provides valuable insights to policymakers, professionals in finance, and management teams of finance companies in Sri Lanka. This study adds to the existing literature on how internal and external variables influence company outcomes by analyzing the effect of firm-specific and macroeconomic factors on financial performance using return on assets as a measure.