CHAPTER THREE

METHODOLOGY AND CONCEPTUALIZATION

2.0 Introduction
This chapter presents the methodology of the research study. The chapter firstly defines the
geographical, demographical and organisational profile of the research study and then the
sample of the study including the sample selection criteria. Then the conceptual diagram
which depicts the relationship between the variables used in the study along with the control
variables is presented. Thereafter the section of measurement of variables, where each
variable illustrated in the conceptual diagram would be briefly elaborated along with the facts
justifying the measures for variables identified while defining the hypothesis developed in
regards to the second objective of the study.
Following would be the sources used for data collection. In the section of ‘IFR
Measurement’, the construction of the comprehensive IFR Index will be explained in detailed
along with its sub-indices. Finally, the chapter would be concluded with a brief on the data
analysis methods used.

2.1 Geographical Profile

The study relies on Sri Lanka which is a country of the southern coast of the Indian
subcontinent and consists of a total area of 65,610 sq. km with 64,740 km² of land and 870
km² of water. Its coastline is 1,340 km long. Sri Lanka is divided into 9 provinces and 25
districts. It has an area of 1025 square kilometers (Index mundi, 2017).

Sri Lanka's climate includes tropical monsoons: the northeast monsoon (December to March),
and the southwest monsoon (June to October). Its terrain is mostly low, flat to rolling plain,
with mountains in the south-central interior. The highest point is Pidurutalagala at 2,524.13
m. Natural resources include limestone, graphite, mineral sands, gems, phosphates, clay, and
hydropower. The country has maximum Length of 432 km (Devundara to Point Pedro) and
maximum width of 224 km (Colombo - Sangamankanda). Sri Lanka is a developing country
which has growing development.

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2.2 Demographic Profile
Sri Lanka has a significant population of 20.95 million in 2018 (down from 21,481,334 in
2013), with the most dense areas lying in the urban areas such as the capital, Colombo, and
other large cities that are also the industrial and economic hubs of the country. It is growing
at a rate of 0.913% annually and houses people from many different ethnicities and religions,
which gives the country a multi-cultural and multi-ethnic identity. The most populated city in
Sri Lanka is also the capital city as well as an ancient port. This city is Colombo, with a
population of 648, 034.

Sri Lanka hosts a dynamic age structure that includes a very large age bracket of 25-54 year
old individuals dominating the country. Around 42.6% of the population lies in that age
bracket. Even though Sri Lanka is a developing economy, such a large working population is
allowing it to pursue development projects and create a large number of jobs that can utilized
by its inhabitants. This is not only helping many people to support their families, but is also
helping Sri Lanka’s economy grow steadily in the last few years. Moreover, the median age
of people in Sri Lanka is estimated to be 31.1 years, with the median age of men being 30.1
years while females have a median age of 32.2 years.

2.3 Organizational Profile

The Colombo stock exchange (CSE) is the organization responsible for the operation of the
stock market in Sri Lanka. It is one of the most modern exchanges in South Asia, providing a
fully automated trading platform (National News Paper, 2017). The vision of the CSE is to
contribute to the wealth of the nation by creating value through securities (National News
Paper, 2017).Headquarters of CSE have been located at the World Trade Centre (Colombo)
and it also has branches in Kandy, Jaffna, Negombo, Matara, Kurunegala, Anuradhapura and
Rathnapura. CSE has 286 companies representing 20 Global Industry Classification Standard
groups as at 31st August 2020, with a market capitalization of Rs.2,316.19Bn (CSE, 2020).

Sample is derived from eliminating some sectors from this organizational profile for the
accuracy of the research. Bank, diversified finance and insurance companies are directly
eliminated because of their different financial disclosures. Apart from that some of the other
companies also eliminated due to the silence of websites. This study is aims to identify the
level of IFR disclosure of companies, in order to identify the IFR disclosure possessing an
active website is an essential aspect also subsidiary companies also eliminated due to the
inability of decision making within the company.
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2.4 Research Methods
There are two basic approaches to research, such as quantitative and the qualitative approach.
Quantitative approach involves the processes of collecting, analyzing, interpreting, and
writing the results of a study (Kumar & Phrommathed, 2005). Whereas Qualitative approach
to research is concerned with subjective assessment of attitudes, opinions and behavior. The
quantitative research approach is employed for measurement of corporate governance
practices since numerical data is used. Further IFR practices can be measured by using
qualitative technique where content analysis used to interpret meaning from the content of
text data through coding textual material, qualitative data can be converted into quantitative
data.

Positivist paradigm asserts that real events can be observed empirically and explained with
logical analysis hence provides an objective reality against which researchers can compare
their claims and ascertain truth. In this research study the researcher adopts a positivist
paradigm approach which involves empirically observing the identified main two variables of
IFR and Corporate Governance and performing a logical analysis to derive a new knowledge
with regards to primarily focusing on the impact of corporate governance on IFR, as extant
literature discussed in Chapter 2 illustrated the dearth of research studies conducted in
relevant area in Sri Lankan context. Furthermore the study will provide a comprehensive
analysis on the objective 1: extent to which Sri Lankan companies are adopting IFR practices.
In this regards the researcher will use a deductive approach to examine the extent to which
IFR practices are adopted in listed companies in Sri Lanka and to examine the impact of
corporate governance on IFR.

2.5 Data Collection

There are two main types of data collection methods namely primary and secondary (Hox &
Boeije, 2005). This study wholly depends on secondary data collection which has already
been collected by someone else and which have already been passed through the statistical
process (Hox & Boeije, 2005). In this research, the data are collected from the annual report
of related listed companies which relies over the period of last financial year (2018/19).

2.6 Population and Study Sample

The primary focus of this study is centered on examining IFR practices and its association
with corporate governance. The researcher has selected listed companies in Colombo Stock
Exchange as the population. As at 31st August 2020, 286 companies are listed in CSE.
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Among the population, the study considers companies that possess websites along with
published annual reports for the year ending 31st of March 2019.

2.6.1 Sample Selection Criteria

As per sample selection criteria 90 companies listed in CSE as at 31st August 2020 were
selected for the research study, among which observations are performed for data collection.
The sample was derived based on following criteria.

(I) Companies that are listed under the non-financial sector.

This study aims to analyse the behaviors of companies any way financial listed companies
undertake different disclosure requirement. It will lead to comparability issues in the research
for that the companies listed under the sectors of bank, diversified financials and insurance
are excluded from the study.

(II) Companies possess websites as a media of information disclosure.

The companies that only has website is the basic requirement for sample selection because
the IFR disclosure is evaluated through the companies’ website. Accordingly companies that
do not possess websites are excluded in deriving at the sample due to the inability of
accessing IFR information.
(III) Companies that possess active website in operation.

Sometime the companies’ existing website might be broken or out of service throughout the
data collection process. Otherwise it might be under construction. That kind of companies are
excluded from the sample selection in order to ensure accuracy and timeliness of data
findings.

(IV) Companies do not fall under the category of subsidiary.

Subsidiary companies are companies that are controlled by the parent company which owns
more than 50% of the share ownership of subsidiary company such that Parent Company
would be directing the activities of the subsidiary companies. The research study considers
only non-subsidiary companies in the sample, as disclosure attempts by subsidiary companies
are under the direction of parent company such that in a given situation both parent and
subsidiary companies are considered it will lead to duplication of corporate governance

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practices would result to distort the independent nature of web appearance of the subsidiary
accordingly subsidiary companies listed in CSE are excluded from the sample.

(V) Companies that use websites for sole purpose commercial trading.

This study aims to find out the level of IFR practices followed by companies using internet as
a media even though some companies using their websites for commercial trading purpose. In
order to drive an accurate sample these type of companies are excluded because it might
impact the accuracy of the result.

(VI) Companies that are actively listed in CSE throughout the research period.

Sample considers companies that are being actively listed in CSE throughout the research
period in order to ensure the accuracy and reliability of data collected. Moreover the sample
only considers companies listed in the Main board and Diri Savi board as such boards reflect
the companies actively participating in CSE. However, the companies that are in categories
of Default board, Dealing suspended, Trading suspended and Trading halt and companies
delisted during the research period are not taken into consideration.

2.6.2 Sample Profile

Table 3.1: Sample selection criteria

Companies listed in CSE as at 31.08.2020

Companies that does not fall under the criteria :
 Financial companies and mutual trusts listed in CSE
 Companies that do not possess websites
 Companies that has website under construction
 Subsidiary companies listed in CSE
 Companies that conducts websites for commercial purposes only
 Companies in categories of Default board, Dealing suspended, Trading
suspended and Trading halt
Final Sample used in the research study

Source: Author constructed.

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2.7 Conceptualization

The study performed by Kelton and Yang (2008) on a similar topic in the context of Malaysia
provides the prime basis for the derivation of the conceptual model of the study.

Independent Variable Dependent Variable

Board Size

Board Independence

Board Diversity

IFR Practices
Role Duality

Audit Committee Independence

Audit Committee Meeting

Figure 3.1: Conceptual Framework

Source: Author constructed.

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2.8 Operationalization
Table 3.2: Operationalization of variables
Key Concept Variables Indicators Measurement
Coded “1” if the average number of board
Number of board
members on board is equal or greater than the
Board size (BSIZE) members in the
board sample mean and “0” otherwise.

Coded “1” if the average number of

Board Number of
independent independent directors on board is equal or
independence
directors in the greater than the sample mean and “0”
(BIND) board
otherwise.
Coded “1” if the average number of women
Board diversity Number of women
Corporate directors in the members on board is equal or greater than the
Governance (BDIV) board
sample mean and “0” otherwise.
(CG)
CEO holds the Coded “1” if role duality exists and “0”
Role duality chairman position otherwise.
(RDUAL) which in turn
increases his power.
Audit committee Number of Coded “1” if average number of independent
independent
independence directors on audit committee is equal or greater
directors in the
(ACIND) audit committee than the sample mean and “0” otherwise.
Coded “1” if average number of audit
Audit committee Number of audit
meeting committee committee meetings is equal or greater than the
(ACMEET) meetings
sample mean and “0” otherwise.

Total score of the dimensions / Maximum

possible score obtainable * 100
Availability of
IFR Practices IFR Index Information in (The adopted framework consists of 35 CSR
websites check list items. Hence, maximum possible
score obtainable for a firm is 35)

Source: Author constructed.

2.9 Hypothesis Development

H1: There is a significant impact of corporate governance on internet financial
reporting practices.

H1a: There is a significant impact of board size on internet financial reporting.

H1b: There is a significant impact of board independence on internet financial reporting.

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H1c: There is a significant impact of board diversity on internet financial reporting.

H1d: There is a significant impact of role duality on internet financial reporting.

H1e: There is a significant impact of audit committee independence internet financial

reporting.

H1f: There is a significant impact of audit committee meeting on internet financial reporting.

H2: There is a significant relationship between corporate governance and internet

financial reporting practices.

H2a: There is a significant relationship between board size and internet financial reporting.
H2b: There is a significant relationship between board independence and internet financial
reporting.
H2c: There is a significant relationship between board diversity and internet financial
reporting.
H2d: There is a significant relationship between role duality and internet financial reporting
internet financial reporting.
H2e: There is a significant relationship between audit committee independence and internet
financial reporting.

H2f: There is a significant relationship between audit committee meeting and internet
financial reporting.

2.10 Construction of Corporate Governance Index

AS discussed in order to measure the overall impact of corporate governance measures the
researcher has developed a CGI which captures all eight corporate governance variables
identified through literature.
The CGI index is a dichotomous variable which in line with prior studies of Ariff (2016)
Manawaduge (2012), where the values assigned for each variable will form the total sum of
CGI in respect of the company.

Table 3.3: Corporate Governance Index

CORPORATE GOVERNANCE INDEX (CGI)
Board size (BSIZE) Coded “1” if the average number of board members on

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Board independence (BIND)
Board diversity (BDIV)
Role duality (RDUAL)
Audit committee independence
(ACIND)
Audit committee meeting (ACMEET)
board is equal or greater than the sample mean and “0”
otherwise.
Coded “1” if the average number of independent directors
on board is equal or greater than the sample mean and “0”
otherwise.
Coded “1” if the average number of female members on
board is equal or greater than the sample mean and “0”
otherwise.
Coded “1” if role duality exists and “0” otherwise.
Coded “1” if average number of independent directors on
audit committee is equal or greater than the sample mean
and “0” otherwise.
Coded “1” if average number of audit committee meetings
is equal or greater than the sample mean and “0” otherwise.

Source: Author constructed.

2.11 Construction of Internet Financial Reporting Index

Based on the empirical studies reviewed, the researcher has developed a comprehensive Total
IFR Index as a checklist against the content analysis of attributes of IFR practices companies
adopt. The index will mainly comprise of two dimensions of content and presentation and
under the content dimension, four sub dimensions are identified illustrating different aspects
of content wise information provided through the web presence of companies.
Accordingly the researcher has developed indices of Total Internet Financial Reporting
(TIFRI) consisting of 35 items and Sub-indices of Total Content Index (TCI) consisting on 25
items, Total Presentation Index (TPI) consisting 10 items. Further, in breaking down the TCI,
Company Information Index (CII) consisting 5 items, Financial and Investor related financial
Information Index (FINVI) consisting 14 items, Corporate Governance Disclosures Index
(CGDI) consisting 4 items, Social responsibility disclosures (SRI) consisting 2 items were
developed to perform a comprehensive analysis on the practice of IFR.

Table 3.4: Internet Financial Reporting Index

Total IFR Index
Total Content Index (TCI)
A. Company Information Index (CII)
Vision, Mission of the Company and or policy statements of the Company( Quality, Environment
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and HR)
2 An overview of Human resource of the Company in terms of Training and development , talent of

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 the staff , Working environment and Culture and welfare programs available to staff
3 Awards and accreditation received by the Company
4 Fact Sheet ( Corporate information)
5 Articles of association of the company
B. Financial and Investor related Financial Information Index (FINVI)
1 Past year annual report
2 Current year annual report
3 Recent financial and investor related news release and announcements
4 Publishing on quarterly reports
5 Financial Calendar of events of interest to investors
6 Publishing of research reports on Share trading activities and related financial reports of Investors
and shareholders’ interest. ( Special notices by the External auditors )
7 Projections related to key financials of the Company
8 Same day stock price
9 Historical stock prices
10 Share price performance in relation to stock market index
11 Information regarding a dividend investment plan
12 History of dividend payment
13 Financial highlights for the year ( Financial Ratios, Graphical illustration )
14 Analysts ratings on the company

C. Corporate Governance Disclosures Index ( CGDI)

1 Names of members of BOD of the Company
2 Profile on BOD
3 Corporate governance principles and guidelines
4 Code of conduct and ethics for directors, officers and employees
D. Social Responsibility Disclosures (SRI)
1 Specific page or tab for Sustainability and CSR
2 Disclosure of CSR and Sustainability non-commercial activities performed by the Company

Total Presentation Index (TPI)

1 Dynamic graphic images
2 Table of contents or Site map
3 Drop down navigation menu
4 Annual report in PDF or HTML format
5 Internal search engine
6 Audio files
7 Video File
8 Direct email to investor relations
9 Email alerts ( To subscribe for investor related information)
10 Hyperlink to data on third party websites

Source: Author constructed.

The constructed Total IFR Index is based on a prominent study by Kelton & Yang 2008 and
in order to realize the objectives of the study an IFR index is required for each company in
the sample hence constructed Total IFR would be viewed against the websites of the sample
companies to identify the presence of IFR in Company websites, where if a particular

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company contains an item in the Index; it’s measured in a simple yes encoded as and
otherwise. Based on the final aggregate of the encodes, a total score is developed as a Total
IFR index for a particular company.

2.12 Statistical Tool

There are two major types of statistics used for analyzing the data namely descriptive
statistics and inferential statistics. Descriptive statistics refers to a discipline that
quantitatively describes the important characteristics of the dataset in the way of measures of
central tendency and measures of dispersion. It shows the summary of behavior of the
variables both corporate governance as well as corporate social responsibility reporting as
mean, median, maximum, minimum and standard deviation.

Inferential statistics includes methods like point estimation, interval estimation and
hypothesis testing which are all based on probability theory. It consists two type of analysis
namely correlation and regression analysis. Correlation is a statistical measure of magnitude
and the direction of the relationship between two variables. The correlation coefficient
measure the linear association of two variables which has a maximum value of 1 and
minimum value of -1. It is used to find out the relationship between the variable namely
corporate governance practices and IFR practices. The regression analysis used to measure
the impact of independent variable namely corporate governance practices, on dependent
variable namely IFR practices. Here multiple regression analysis used to find out how the
multiple independent variables impact on dependent variable.

2.13 Model Specification

The following regression model has been formulated for this study to interpret the direction
of relationship and impact of the multiple independent variables on dependent variable.
IFRRI = α + β1 BSIZE + β2 BIND + β3 GDIV + β4 RDUAL + β5 ACIND+ β6 ACMEET+ ε
BSIZE : Board size
BIND : Board independence
GDIV : Gender diversity
RDUAL : Role duality
ACIND : Audit committee independence
ACMEET : Audit committee meeting frequency
TIFRI : Internet financial reporting index
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ε : Error

β1, β2, β3,β4, β5 β6

: Model coefficient
α : Intercept

2.14 Method of Data Analysis

Data analysis is the most sensitive part of the research process. The data is analyzed and
evaluated using the software STATA version 12 and E-Views. The results of the analysis is
organized in tables and graphs and then used to answer the study questions.

2.15 Chapter Summary

This chapter provided an overview of the research methodology used in the study. Initially
the chapter gave an introduction of research method used the population and sample of the
research study. Then the conceptual diagram of the study indicating the relationship of the
variables under the consideration of the study.

Under the measurement of variable the chapter defines the method of quantifying the each
component of the dependent, independent and control variables of the study. In reference to
the measurement of dependent variable as stated an index was developed which is
comprehensively explained under the instrumentation. Then the chapter moves to the data
collection and data analysis procedures adopted in the research study to attain the objectives
and finally concluding providing a small brief of the entire chapter.

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