Determinants of Financial Performance of Listed Insurance and Finance Companies in Sri Lanka

Abstract

This study analyses of determinants of financial performance of listed insurance and finance companies in Sri Lanka. The objective of the study is to identify the determinants of financial performance and how these determinants influence on the financial performance of Sri Lankan listed insurance and finance companies. In a sample of 35 companies out of 62 registered companies by using the Stratified Random Sampling technique, secondary data was collected from annual reports between 2014 and 2023. The correlation test, Polled OLS regression model, fixed effect model, random effect model, Hausman test to determine the best model, and diagnosis test for confirming the stability of the regression model are employed to reach the objectives; the study employed both descriptive and inferential analysis research designs, using determinants such as liquidity ratio, solvency ratio, capital adequacy ratio, and firm size to measure financial performance. The findings contribute to the existing literature by validating previous studies and analysing the relationship between these factors and financial performance, showing that capital adequacy and solvency ratios have a positive correlation with Return on Assets (ROA) and Return on Equity (ROE). Thus, significantly influencing financial performance in Sri Lankan insurance and finance companies. Firm Size (FS) impacts operational scale moderately, and Solvency Ratio (SR) suggests firms generally meet long term debt obligations adequately. Liquidity Ratio (LR) varies in firms' ability to meet short term obligations, and Capital Adequacy Ratio (CAR) indicates sufficient capital relative to risk despite disparities. Positive correlations exist between ROA and ROE, emphasizing profitability linked to equity management, with larger firms showing slight advantages in profitability. Better-capitalized firms correlate positively with ROA and ROE, indicating more robust financial performance and risk management. The pandemic's impact is evident with a significant decrease in ROE post-Covid, contrasting stable ROA. The sector-specific analysis highlights higher profitability among insurance companies compared to finance firms