Background on the Economic Environment of Sri Lanka

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Political Situation since 1972 and the Current Government Structure

After becoming a republic in 1972, the Sri Lankan government changed the constitution to create the post of an executive presidency in 1977. The government removed the powers from the post of Prime Minister and modelled the Executive Presidency after that of France (Jayatilaka, 2010). From the early 1980s ethnic tensions between the Sinhalese and Tamils manifested into violence and are detailed in the timeline of the civil war in section 2.3 below.
The current political framework of Sri Lanka is based around a Presidential representative democratic republic, where the President is both the head of state and head of government. The post of Executive President is elected for a term of six years. The multi-party system is dominated by the centre-leftist and progressive “United People‟s Freedom Alliance” (UPFA) and the comparatively right-wing pro-capitalist “UnitedNational Party” (UNP). Generally, the UPFA believes in a more active role of the state, while the UNP believes in a more capitalist role. There are many smaller Buddhist, Socialist, Tamil nationalist political parties. The parliament consists of 225 members and is elected for six years. The parliament makes all laws; however, the President may
summon, suspend or dissolve the parliament. The Judicial system of the Sri Lankan political framework is headed by the Supreme Court which has the highest and final court of record (Lanka Library, 2009).
After the conclusion of the Presidential elections of 2005 in which Mahinda Rajapaksa (UPFA) won against Ranil Wickremasinghe (UNP) by the slimmest of margins, the political situation remained tense. The election of Mr Rajapaksa as President resulted in increased violence in the North and East even though the President has continued pursuing peace talks with the separatist terrorist group, the Liberation Tigers of Tamil Eelam (LTTE) (Country Monitor, 2006). The 2002 ceasefire agreement concluded in 2006 with the government forces officially starting military action against the LTTE.
International efforts to bring lasting peace appeared to have failed with the peace talks not going beyond the second round (Asia Monitor, 2006). The final details of the war are explained in more detail in section 2.3 below.
The last Presidential election held in 2010 is also won by President Rajapaksa with nearly 60% of the vote. The euphoria of the victory over the LTTE helped the UPFA win the 2010 Parliamentary elections as well (Department of Elections, 2008). The UPFA coalition managed to secure two thirds majority in the parliament which is the first time since 1977, a political party in Sri Lanka has managed this feat. This is a major victory for the government as this allowed them to amend the constitution as they wished. Hence, the government passed the 18th amendment to the constitution which allows a person to become President for any number of times which exceeded the previous limit of two terms (Fernando S. , 2010).
The Sri Lankan government passed a further controversial piece of legislation on 9th November 2011 which allows the government to acquire firms or assets which it deems to be underperforming or underutilised. The legislation, which was opposed by the opposition party, allows the government to acquire 37 assets including two listed firms on grounds of national interest. The President‟s younger brother Basil Rajapaksa, who is also the Economic Development Minister, told parliament that no private assets have come under the Act, in order to address concerns that this legislation will adversely affect local and foreign investment in the economy. The Minister further stated the owners of these assets will be compensated; however, the basis of compensation is not yet clear.

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1 Introduction
2 Background on the Economic Environment of Sri Lanka
2.1 Early Origins and Summary of Country
2.2 Political Situation since 1972 and the Current Government Structure
2.3 Timeline of the Sri Lankan Civil War
2.4 Economic Composition
3 Literature Review
3.1 Estimating the Value of Political Connections by R. Fisman (2001)
3.2 Cronyism and Capital Controls: Evidence from Malaysia by S. Johnson and T. Mitton (2001)
3.3 Politically Connected Firms by M. Faccio (2003)
3.4 Corporate Governance Practices and Firm Performance of Listed Companies in Sri Lanka by K. Heenetigala (2011)
3.5 Political Connections and Minority-Shareholder Protection: Evidence from Securities-Market Regulation in China by H. Berkman, R.A. Cole and L.J. Fu (2011)
3.6 Further Studies on Political Connections and Firm Performance
4. Methodology
4.1 Events for Event Study
4.2 Political Connection Variables
4.3 Firm Performance Variables
4.4 Event Study Methodology .
5 Hypotheses
6 Data
7 Results .
8 Conclusion
9 Appendices
10 Reference List