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Mohammad Abidur Rahman a.rhmn@yahoo.com

Term Paper, Department of Management Studies, Dhaka University, 2010

Study of Corporate Governance in Bangladesh through the Impact of Ownership Structure on Firms Performance

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Mohammad Abidur Rahman a.rhmn@yahoo.com

Term Paper, Department of Management Studies, Dhaka University, 2010

Study of Corporate Governance in Bangladesh through the Impact of Ownership Structure on Firms Performance

SUBMITTED TO

Mr. Mohammad Thoufiqul Islam Assistant Professor

Department of Management Studies Faculty of Business Studies University of Dhaka

SUBMITTED BY

GROU: 0 4

NAME

ID No.

Mohammad Abidur Rahman

3-09-15-004

Shirin Sultana

3-09-15-022

Mohammad Kamruzzaman

3-09-15-045

Debashish Roy

3-09-15-047

Mohammed Mojibul Haider

3-09-15-057

DATE OF SUBMISSION : 07-04-2010

Haider 3-09-15-057 DATE OF SUBMISSION : 07-04-2010 Department of Management Studies Faculty of Business

Department of Management Studies Faculty of Business Studies University of Dhaka

2

April 07, 2010

Mr. Mohammad Thoufiqul Islam Assistant Professor, Department of Management Studies University of Dhaka

Subject:

Submission of Paper

Sir,

Mohammad Abidur Rahman a.rhmn@yahoo.com

Term Paper, Department of Management Studies, Dhaka University, 2010

We are very pleased to submit the Report on “Study of Corporate Governance in Bangladesh through the Impact of Ownership Structure on Firms Performance” which was assigned us as a part of our Paper. To prepare this report we have tried to examines how corporate governance is practiced through ownership structure and how firm performance, public disclosures as well as its dividend payout policy are influenced by different ownership pattern. We also tried to match theoretical knowledge and the direct experience gathered during a short span time. Any modification required and query needed regarding this report will be gratefully acknowledged.

With best regards,

Sincerely yours,

Mohammad Abidur Rahman ID No. 3-09-15-004

Shirin Sultana ID No. 3-09-15-022

Mohammad Kamruzzaman ID. No. 3-09-15-045

Debashish Roy ID No. 3-09-15-047

Mohammed Mojibul Haider ID No. 3-09-15-057

Group: 04

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Table of Content

Mohammad Abidur Rahman a.rhmn@yahoo.com

Term Paper, Department of Management Studies, Dhaka University, 2010

Abstract

05

I. Introduction

06

Objectives

07

Limitations of the Study

07

II. Literature Review

08

What is All about Corporate Governance?

08

History of corporate governance in Bangladesh

08

Scope of Corporate Governance

10

Corporate Governance and Ownership Structure

10

The Rights of Shareholders and Key Ownership Functions defined by OECD

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III. Methodology

13

IV. Findings

14

Ownership Structure upon Firm Performance

14

Managerial Decisions on Ownership Structure

14

Ownership Structure and Public Announcements’ Disclosures

15

Ownership Structure and Debt Policy

15

V. Finding Analysis

16

Ownership Structure upon Firm Performance

16

Managerial Decisions on Ownership Structure

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Ownership Structure and Public Announcements’ Disclosures

20

Ownership Structure and Debt Policy

21

Ownership Structure with other effect (Pension Reforms)

21

VI. Recommendations

22

VII. Conclusion

22

References:

26

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Abstract

Mohammad Abidur Rahman a.rhmn@yahoo.com

Term Paper, Department of Management Studies, Dhaka University, 2010

This paper examines how corporate governance is practiced through ownership structure and how firm performance, public disclosures as well as its dividend payout policy are influenced by different ownership pattern. In doing so, this paper attempts to investigate the pattern of ownership mix and ownership concentration scenario towards sponsorship in Bangladesh, the relationship between the ownership structure and firm performance and finally the impact of ownership structure upon firm’s dividend payout policy. The methodology used here is completely a conceptual one whose basic foundation comes from various secondary sources like research articles, published and unpublished scholarly papers and books, various international and local journals, speeches, newspapers and websites. Here ownership structure has been considered as an effective tool of corporate governance. In this study, the relations between firm’s return and value with ownership variables along with firm’s specific variables controlling the industry effects have been examined. Our empirical results provide evidence that foreign holding is positively and significantly related to the firm performance. We also provide empirical evidence that firms with high institutional ownership and firms with concentrated ownership pay high and less dividend payout respectively. We shows that at first, when ownership increases, firm value increases as well, because of the benefits of a better monitoring, but when ownership is too concentrated the value of the firm starts to decrease. Under concentrated ownership, conflicts of interest arise between controlling and minority shareholders and the controlling shareholders’ decisions may result in the expropriation of the minority shareholders.

Keywords: Ownership Structure, Ownership Concentration, Institutional Ownership, firm’s performance, Corporate Governance, Bangladesh

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I. Introduction

Mohammad Abidur Rahman a.rhmn@yahoo.com

Term Paper, Department of Management Studies, Dhaka University, 2010

The objective of this paper is to investigate the pattern and variation of ownership structure of Bangladeshi listed companies and to document empirically the relationship between firm performance and corporate governance through ownership structure. As a consequence, this paper deals with what impact does ownership structure has on firm performance and dividend payout policy.

The need for corporate governance arises from the potential conflicts of interest among participants (stakeholders) in the corporate structure. These conflicts of interest often arise from two main reasons. First, different participants have different goals and preferences. Second, the participants have imperfect information as to each other’s actions, knowledge, and preferences. Jensen and Meckling 1 addressed these conflicts by examining the separation of corporate ownership from corporate management. They noted that this separation, with the absence of other corporate governance mechanisms, provides executives with the ability to act in their own self-interest rather than in the interests of shareholders. Of the all corporate governance mechanism that have been studied in US and UK, ownership structure is the one that has probably been studied extensively in the rest of the world. This is probably because in countries other than UK and US, corporate governance mechanisms like an active market for corporate control, managerial labor market, stock-based managerial compensation scheme, independent directors in the board, provision of executive committee and audit committee chaired by independent director etc. are not very effective in the setting of weak regulatory and legal framework, and in the absence of full functioning of capital market. In this setting, governance through ownership structure becomes the most important element of corporate governance. Bangladesh fits neatly into this situation. Hence, this study investigates whether ownership structure has any significant effects on the performance of the listed companies in Dhaka Stock Exchange and firm payout policy. The listed companies allow us to quantify the ownership mix and concentration and thus provide a unique opportunity for studying the above issue.

Corporate governance can be seen as the mean to reduce the agency costs produced by aligning managerial and shareholders’ interests, which should lead to a higher firm valuation.

This paper attempts to identify the different dimensions that could predict the relationship between firm’s performance and ownership structure after controlling for firm’s specific variables and industry effects. Collecting data and information from various articles, it is shown that a large fraction of cross-sectional variation in performance, found in several studies, is explained by unobserved firm heterogeneity, rather than the shareholders holding. Our empirical results provide evidence that foreign holding is positively and significantly related to the firm performance and the relationship is a non-monotonic one. We also observed the

1 Jensen M C and W H Meckling, 1976, “Theory of Firms, Managerial Behaviors, Agency Costs and Ownership Structure”, Journal of Financial Economics, October, 305-306.

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Mohammad Abidur Rahman a.rhmn@yahoo.com

Term Paper, Department of Management Studies, Dhaka University, 2010

findings that firms with high institutional ownership and firms with concentrated ownership pay high and less dividend payout respectively.

Objectives:

To examines the current state of CG practices in Bangladesh

To identifies the forces that act as barrier for CG

To assess briefly the contemporary CG issues to provide an overview of the weaknesses and regulatory efforts at implementing and enforcing good CG structure in Bangladesh

To know what is all about corporate governance.

To recommend regarding implication of good governance in corporate sector in Bangladesh

Limitations of the Study

During this study, it has been found that not much of research has been conducted on the CG landscape in Bangladesh. Indeed, there are ample of studies available on the methods and principles of CG from Bangladesh’s perspectives but there is a substantial lack of sector specific empirical and real- life studies. There is an absence of credible data and relevant information on the real CG concerns in Bangladesh. Given the time limitation, comprehensive access to information was a difficult task. A systemic and periodic survey of CG practices in Bangladesh has thus become an important task for the organizations like DCCI, BEI, and SEC. 2

2 Acronyms: Dhaka Chamber of Commerce and Industry (DCCI), Bangladesh Enterprise Institute (BEI), Securities and Exchange Commission

(SEC)

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II. Literature Review

What is All about Corporate Governance?

Mohammad Abidur Rahman a.rhmn@yahoo.com

Term Paper, Department of Management Studies, Dhaka University, 2010

According to the Oxford English Dictionary 3 states governance to be ‘‘the act or

manner of governing, the office or function of governing, sway, control’’. In this definition it is not to government and such but rather to management as ‘‘handle, administer, run, supervise, look after, watch over, direct, head, oversee,

superintend, preside over, be in charge of

lay user of such words 4 . According to Tricker [1994], corporate governance is an umbrella term that includes specific issues from interactions among senior management, shareholders, board of directors, and other corporate stakeholders. In its narrowest sense, the term may describe the formal system of accountability of senior management to the shareholders. A school of thought defines the corporate governance as “system” by which companies are directed and controlled (Cadbury and Greenburg Report, CFACG 1992). Another school views corporate governance as “structures and processes for decision making, accountability, control and behavior at governing body” (Public accounts and Estimated Committee 2002). The World Bank argues that the frame work of corporate governance should be based on four pillars- of Responsibility, Accountability, Fairness and Transparency (RAFT).

.’’ This all seems to make sense to the

Good corporate governance (GCG) in a corporate set up leads to maximize the value of the shareholders legally, ethically and on a sustainable basis, while ensuring equity and transparency to every stakeholder – the company’s customers, employees, investors, vendor-partners, the government of the land and the community 5 (Murthy, 2006). GCG is a must for ensuring the required values to different stakeholder groups. It enhances the performance of corporations, by creating an environment that motivates managers to maximize returns on investment, enhance operational efficiency and ensure long–term productivity growth. Consequently, such corporations attract the best talent on a global basis. It also ensures the conformance of corporations with the interests of investors and society, by creating fairness, transparency and accountability in business activities among employees, management and the board 6 (Oman, 2001).

History of corporate governance in Bangladesh

Since the early 1990s, Corporate Governance (CG) 7 in Bangladesh has been receiving increasing attention from regulatory bodies and practitioners worldwide. Corporate sectors are still in its initial stage; nevertheless awareness of the importance of CG is growing. Bangladesh's small size and lack of natural resources have necessitated an open trade policy. Bangladesh also has a liberal policy

3 The Oxford English Dictionary

Kenneth Tombs, Records Management Journal, Volume 12. Number 1, 2002. pp. 24±28 5 Murthy, N. R. N. 2006. Good Corporate Governance – A checklist or a mindset? Robert P. Maxon Lecture, George

Washington University, February 06, 2006.
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Oman, C. P. 2001. Corporate Governance and National Development, OECD Development Center, Technical Papers No. 180. Paris. 7 Study Report on Corporate Governance in Bangladesh: How Best to Institutionalize it, Critical Practices and Procedures

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Mohammad Abidur Rahman a.rhmn@yahoo.com

Term Paper, Department of Management Studies, Dhaka University, 2010

towards foreign direct investment (FDI). However, when compared to those of the India, Sri Lanka, Pakistan, Thailand and Malaysia, CG in practice and philosophy have up till now remained relatively under-developed in Bangladesh. Further, there appears to be a lack of either market or structural governance mechanisms to discipline errant managers. To govern the corporate environment in Bangladesh, following legal measures are in practice:

Securities and Exchange Ordinance 1969

Bangladesh Bank Order 1972

Bank Companies Act 1991

Financial Institutions Act 1993

Securities and Exchange Commission Act 1993

Companies Act 1994

Bankruptcy Act 1997

However, to institutionalize the practice of CG in Bangladesh, first initiative was undertaken by the Securities and Exchange Commission (SEC). SEC issued a notification on Corporate Governance Guidelines (CG Guidelines) for the publicly listed companies of Bangladesh under the power vested on the Commission by Section 2CC of the Securities and Exchange Ordinance, 1969. The CG Guidelines were issued on a ‘comply or explain’ basis, providing some ‘breathing space’ for the companies to implement on the basis of their capabilities. Nevertheless, the overall framework for investor protection and CG has a number of important weaknesses that have hindered the capital market development. Most of the companies depend on the banks as their major source of financing. Capital market in Bangladesh is still at an emerging stage with market capitalization amounting to only 6.5% of GDP with low investor confidence on corporate governance and financial disclosure practices in many companies listed in the stock exchanges. 8 The neighboring countries are well ahead vis-à-vis Bangladesh in terms of depth of capital market. For example, in India, Pakistan and Sri Lanka, the market capitalization is 56%, 30% and 18% of their GDP respectively.

CG practices in Bangladesh are gradually being introduced in most companies and organizations. 66.7 percent of the companies have adopted CG and 43.3 percent have compliance policy with national or international benchmarks. A considerable percentage of the top management does not fully understand the concept of CG. However, Bangladesh has lagged behind its neighbors and the global economy in CG. 9 One reason for this slow progress in adopting CG is that most companies are family oriented. Such concentrated ownership structures affects the effectiveness of corporate governance mechanisms, which weaknesses cannot be rectified by laws and regulations. Motivation to disclose information and improve governance practices by companies is also felt negatively. There is neither any value judgment nor any consequences for CG practices. The current sys tem in Bangladesh does not provide sufficient legal, institutional and economic motivation for stakeholders to encourage and enforce CG practices.

8 Du, Hua. 2006. Roundtable Discussion on Corporate Governance Guidelines of SEC and its implementation practices in

Bangladesh.Asian Development Bank. 23 September 2006.
9

Gillibrand, M. 2004. Corporate Management Essential for Industrialization. The Bangladesh Observer, April 17, 2004.

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Scope of Corporate Governance

Mohammad Abidur Rahman a.rhmn@yahoo.com

Term Paper, Department of Management Studies, Dhaka University, 2010

Corporate governance is the system by which companies are directed and controlled. 10 The basic objectives of corporate governance is to ensure that the directors of a company are subject to their duties, obligations and responsibilities, to act in the best interest of the company, to give direction and to remain accountable to the shareholders and other beneficiaries for their actions. Though these definitions aims to identify all business organizations to which corporate governance should apply, in practice its coverage has been very limited. At least the enforcement has been restricted only to specific types of corporations in Bangladesh 11 . While those left out who realize the long term benefits accrued by adopting corporate governance practices take them up voluntarily, there are a few, who move Scot free and pose a threat to fair competition.

Corporate Governance and Ownership Structure

Corporate governance is an important effort to ensure accountability and responsibility and a set of principles, which should be incorporated into every part of the organization. Though it is viewed as a recent issue, there is, in fact, nothing new about the concept. Because it has been in existence as long as the corporation itself – as long as there has been large–scale trade, reflecting the need for responsibility in the handling of money and the conduct of commercial activities. Corporate governance has succeeded to attract a great deal of interest as it focuses not only the long-term relationship, which has to deal with checks and balances, incentives for managers and communications between management and investors but also the transactional relationship, which involves dealing with disclosure and authority. The definition of disclosure captures the release of relevant information, either in the form of press releases, public announcements, or financial reports.

Ownership structure of a corporation is basically divided into three categories 12 . These are institutional ownership, managerial ownership and individual ownership. Institutional owners include pension funds, mutual funds, life insurance companies, trust departments of commercial banks, property and casualty insurance companies, closed-end funds, savings institutions, and commercial bankers. Normally they include the company’s share as their portfolio investment. Though they are in smaller number, institutional investors control most of the “dollar votes” and have a larger impact on securities prices than the individual investors. Managerial ownership consists of directors, managers, and other management teams members, who hold the company’s shares directly. Concentrated ownership falls in this category, where family members control the majority portion of shares.

10 Cadbury Committee (Committee on the Financial Aspects of Corporate Governance). 1992. The Report of the Committee

on the Financial Aspects of Corporate Governance. London: UK.

11 Mohammad Shamsuddoha, M S Quader, H S Shohrowardhy, Corporate Governance and its Implication in Bangladesh,

http://ssrn.com/abstract=1302313

12 Huson Joher,The Impact Of Ownership Structure On Corporate Debt Policy: Two Stage Least Square Simultaneous Model Approach For Post Crisis Period: Evidence From Kuala Lumpur Stock Exchange, International Business & Economics Research Journal – May 2006

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Mohammad Abidur Rahman a.rhmn@yahoo.com

Term Paper, Department of Management Studies, Dhaka University, 2010

The third group of investors is the individual owners. This group constitutes a major pie of total shareholding as compare to developed countries. Nonetheless, they do not control much of dollar vote. Hence no effective control mechanism could be placed on managerial decision making.

The corporate governance framework is the widest control mechanism, both internal and external, to encourage the efficient use of corporate resources and equally to require accountability for the stewardship of those resources. The challenge of corporate governance could help to align the interests of individuals, corporations and society through a fundamental ethical basis and it will fulfill the long-tem strategic goal of the owners, which, after survival may consist of building shareholder value, establishing a dominant market share or maintaining a technical lead in a chosen sphere. It will certainly not be the same for all organizations, but will take into account the expectations of all the key stakeholders, in particular:

considering and caring for the interests of employees, customers and suppliers, stockholders and debt holders, state and local community, both in terms of the physical effects of the company’s operations and the economic and cultural interaction with the population. So maintaining proper compliance with all the applicable legal and regulatory requirements under which the company is carrying out its activities is also achieved by sound practice of corporate governance.

Theoretical position of corporate governance states that firm’s control by shareholders should be raised as much as possible. Specifically, the essence of this position is to straighten the surveillance of the stock market through such means as stockownership, institutionalized monitoring by shareholders at general shareholder meeting and corporate take over. In practical position, two distinct forms of governance system separately developed for large corporations in economic and financial literature were named as the Anglo-American type (outsider system) & the Japanese-German type (insider system). There are a number of striking differences in concentration and nature of ownership between both systems. For example, in a typical Continental European country under Japan German system (majority) control is held by one shareholder or a small group of interlocked (corporate) shareholders, whereas Anglo-American companies are predominantly widely held. So the Anglo-American type is dominated by shareholders interest through the market corporate control. On the contrary in the Japanese-German type the large block of stable shareholding by financial institutions and the prevalence of interlocking shareholding effectively prevent hostile takeovers and, hence, the average shareholder would seem to have very little influence. However, these two systems work to the extent depending on financial structure of the country.

Corporate governance has received new urgency because of global financial crisis and major corporate failures that shock major financial centers of the world. Research on corporate governance across the countries has focused on diverse elements and dimensions as the breadth and depth of it. In practice, corporate governance and monitoring mechanisms recently focused on matters like the composition of the Board of Directors, the duties and responsibilities of the executive directors, regular monitoring by shareholders, anti takeover devices, voting rights of shareholders and detailed disclosure of company information that

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Mohammad Abidur Rahman a.rhmn@yahoo.com

Term Paper, Department of Management Studies, Dhaka University, 2010

are material for decision making by interested parties. The corporate governance framework should protect and facilitate the exercise of shareholders’ rights. Shareholders should have the right to participate in, and to be sufficiently informed on, decisions concerning fundamental corporate changes. Shareholders, including institutional shareholders, should be allowed to consult with each other on issues concerning their basic shareholder rights as defined in the Principles, subject to exceptions to prevent abuse. The equitable treatment of all shareholders, including minority and foreign shareholders should be ensured by corporate governance also. Minority shareholders should be protected from abusive actions by, or in the interest of, controlling shareholders acting either directly or indirectly. Stakeholders, including individual employees and their representative bodies, should be able to freely communicate their concerns about illegal or unethical practices to the board and their rights should not be compromised for doing this. Another important responsibility of corporate governance is the timely and accurate disclosure of all material matters regarding the corporation. Information should be prepared and disclosed in accordance with high quality standards of accounting and financial and non-financial disclosure. Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders. The board should apply high ethical standards. Board members should be able to commit themselves effectively to their responsibilities.

The public image of a corporation will quite accurately reflect the culture of that body. If follows, then, that good corporate governance has to be in the bones and bloodstream of the organization since this in turn will be reflected in the culture. Adherence to the principle of good corporate governance serves to foster investor confidence and attract domestic as well as foreign investors. But Bangladesh is sadly lagging behind in this respect. Recently as a regulatory body, Securities and Exchange Commission, Bangladesh strives to stimulate the listed companies comply the corporate governance guidelines issued by them so that the suppliers of funds assure themselves of getting a return on their investment. In case of any infringement of this effort, listed companies have to show grounds with proper explanations in deed.

It is seen from the table of ownership holding by top five shareholders classified by industry that ownership in Bangladesh is largely concentrated in a few hands especially in non-financial publicly listed firms. It is observed that these top shareholders belong mostly to controlling family.

All corporate governance systems revolve around four core principles: Fairness, accountability, responsibility and transparency. The specific challenges of upholding these principles depend on the ownership structure of the corporate sector. However, in Bangladesh, general practice is that the corporate structure is dominated by family members. Such practice hinders the level of fairness, accountability and transparency. It is revealed that in Bangladesh 72.5% of the outstanding shares are owned by households/ sponsors and individuals. Insignificant concentration is observed by bank and financial institutions i.e., 3.1 % and foreigners held 16% and Government / financial institutions held only 16% of the outstanding shares in 2000. It is also reported that even when the company is listed on the stock exchange, few shares are available for trading, as majority

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Mohammad Abidur Rahman a.rhmn@yahoo.com

Term Paper, Department of Management Studies, Dhaka University, 2010

remain held by the original sponsors. The original sponsors often buy additional shares from the market to raise their holdings to as high as 70 percent or 80 percent though shares are floated in the primary market on 50:50 basis. 13

The main dimensions of ownership structure: insider ownership, which is usually measured as the proportion of shares held by insiders, and ownership concentration (Block), which is usually measured as the proportion of shares held by the largest shareholders or by significant shareholders (e.g., McConnell and Servaes 14 , 1990; Agrawal and Knoeber 15 , 1996; Demsetz and Villalonga 16 , 2001; De Miguel 17 et al., 2004; Boubraki 18 et al., 2005).

Corporate Responsibility issue bears significance for Bangladesh on the following considerations 19 :

Corporate Social Responsibility has been increasingly becoming a part of the business practice

It has generally been considered as a pragmatic response to consumer and civil society pressures

To a great extent Corporate Responsibility supports the Small and Medium Enterprise Development in developing countries and is considered crucial to meeting its goal of improving the impact of business on societies.

It is thought that corporate standard would be enhanced if corporate responsibility is under pinned by an infallible business case that links social and environmental responsibility with financial success.

Supporting enterprise development through long-term trading relationships and community investment is considered as one of the most practical ways by which the corporatist can help the poverty stricken countries such as Bangladesh in fighting poverty.

The Rights of Shareholders and Key Ownership Functions defined by OECD

The corporate governance framework should protect and facilitate the exercise of shareholders’ rights. 20

A. Basic shareholder rights should include the right to: 1) secure methods of ownership registration; 2) convey or transfer shares; 3) obtain relevant and material information on the corporation on a timely and regular basis; 4) participate and vote in general shareholder meetings; 5) elect and remove members of the board; and 6) share in the profits of the corporation.

13 Chowdhury, AA Mahboob Uddin. 2006. Role of corporate governance for the development of Bangladesh capital market. Editorial Page. The New Nation. 17 May 2006. http://nation.ittefaq.com/artman/publish/article_27929.shtml

14 McConnell, J. J. and Servaes, H. (1990) Additional Evidence on Equity Ownership and Corporate Value, Journal of Financial Economics, 27, 595– 612.

15 Agrawal, A. and Knoeber, C. (1996) Firm Performance and Mechanism to Control Agency Problems between Managers and Shareholders, Journal of Financial and Quantitative Analysis, 31, 377–399.
16

Demsetz, H. and Villalonga, B. (2001) Ownership Structure and Corporate Performance, Journal of Corporate Finance, 7,

209–233.

17 De Miguel, A., Pindado, J. and De la Torre, C. (2004) Ownership Structure and Firm Value: New Evidence from the Spanish Corporate Governance System, Strategic Management Journal, 25, 1199– 1207.

18 Boubraki, N., Cosset, J. C. and Guedhami, O. (2005) Postprivatization Corporate Governance: The Role of Ownership Structure and Investor Protection, Journal of Financial Economics, 76(2), 369–399.

19 Corporate Responsibility in Bangladesh: Where Do We Stand?

20 OECD Principles of Corporate Governance, OECD, 2004

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Mohammad Abidur Rahman a.rhmn@yahoo.com

Term Paper, Department of Management Studies, Dhaka University, 2010

B. Shareholders should have the right to participate in, and to be sufficiently informed on, decisions concerning fundamental corporate changes such as:

1) amendments to the statutes, or articles of incorporation or similar governing documents of the company; 2) the authorisation of additional shares; and 3) extraordinary transactions, including the transfer of all or substantially all assets, that in effect result in the sale of the company.

C. Shareholders should have the opportunity to participate effectively and vote in general shareholder meetings and should be informed of the rules, including voting procedures, that govern general shareholder meetings:

1. Shareholders should be furnished with sufficient and timely information concerning the date, location and agenda of general meetings, as well as full and timely information regarding the issues to be decided at the meeting.

2. Shareholders should have the opportunity to ask questions to the board, including questions relating to the annual external audit, to place items on the agenda of general meetings, and to propose resolutions, subject to reasonable limitations.

3. Effective shareholder participation in key corporate governance decisions, such as the nomination and election of board members, should be facilitated. Shareholders should be able to make their views known on the remuneration policy for board members and key executives. The equity component of compensation schemes for board members and employees should be subject to shareholder approval.

4. Shareholders should be able to vote in person or in absentia, and equal

effect should be given to votes whether cast in person or in absentia.

D. Capital structures and arrangements that enable certain shareholders to obtain a degree of control disproportionate to their equity ownership should be disclosed.

E. Markets for corporate control should be allowed to function in an efficient and transparent manner.

1. The rules and procedures governing the acquisition of corporate control in the capital markets, and extraordinary transactions such as mergers, and sales of substantial portions of corporate assets, should be clearly articulated and disclosed so that investors understand their rights and recourse. Transactions should occur at transparent prices and under fair conditions that protect the rights of all shareholders according to their class.

2. Anti-take-over devices should not be used to shield management and

the board from accountability.

F. The exercise of ownership rights by all shareholders, including institutional investors, should be facilitated.

1. Institutional investors acting in a fiduciary capacity should disclose their overall corporate governance and voting policies with respect to their investments, including the procedures that they have in place for deciding on the use of their voting rights.

2. Institutional investors acting in a fiduciary capacity should disclose how they manage material conflicts of interest that may affect the exercise of key ownership rights regarding their investments.

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Mohammad Abidur Rahman a.rhmn@yahoo.com

Term Paper, Department of Management Studies, Dhaka University, 2010

G. Shareholders, including institutional shareholders, should be allowed to consult with each other on issues concerning their basic shareholder rights as defined in the Principles, subject to exceptions to prevent abuse.

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III. Methodology

Mohammad Abidur Rahman a.rhmn@yahoo.com

Term Paper, Department of Management Studies, Dhaka University, 2010

The paper is completely a conceptual one whose basic foundation comes from various secondary sources like research articles, published and unpublished scholarly papers and books, various international and local journals, speeches, newspapers and websites. Secondary sources include literature on firm performance, public disclosures as well as its dividend payout policy influenced by different ownership pattern, social responsibility and business ethics, financial statement of the companies and corporate disclosures. The linkage of ownership structure for successful corporate governance is the personal idea of us. To remain with the main idea of the paper, Good Corporate Governance (GCG) is defined followed by a discussion of different variant of frameworks of GCG, present status of corporation, accounting, public disclosures, decision making and GCG interrelationship, justification with the concluding remarks at the end.

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IV. Findings

Mohammad Abidur Rahman a.rhmn@yahoo.com

Term Paper, Department of Management Studies, Dhaka University, 2010

Ownership Structure upon Firm Performance

Mahmood Osman Imam and Mahfuja Malik 21 (2007) provide empirical evidence on the nature of corporate governance through ownership structure in the context of Bangladesh. It does also reveal the pattern of ownership mix and ownership concentration scenario towards sponsorship in Bangladesh, the relationship between the ownership structure and firm performance and finally the impact of ownership structure upon firm’s dividend payout policy. They observe that ownership structure holding by top five shareholders classified by industry in Bangladesh is largely concentrated in a few hands especially in non-financial publicly listed firms. They also observe that these top shareholders belong mostly to controlling family. They imply ownership concentration to affect profitability significantly negatively. The negative effect of ownership concentration can be traced back to family- or foreign-owned non-quoted firms as well as quoted firms with different large shareholders. A positive impact of ownership concentration on profitability, supportive of managerial discretion and agency theories (Principal- agent relationships should reflect efficient organization of information and risk- bearing costs), shows up for quoted firms, which have financial institutions as large shareholders. Omar Al Farooque et al 22 (2007) support M. O. Imam & M. Malik (2007) and observe a significant negative effect of board ownership, implying that

higher levels of board shareholding lead to declining firm performance and vice-versa.

According to Juan P. et al 23 (2007), it is also notable that while the effect of ownership concentration on accounting based performance measures is positive and linear, the effect of ownership concentration on market-based performance measures is non-linear. He predicts decreasing returns to ownership concentration after a certain level, whereas accounting returns are positive in a linear way. The findings show the negative expectations of market about the effectiveness of ownership concentration when it is too high, due to the expropriation effect of minority shareholders. He also noted that the relationship between insider ownership and firm performance indicate that in linear regressions insider ownership has shown a positive and significant effect on firm value, confirming that insider ownership is an important mechanism for aligning the interests of insiders with the rest of shareholders. In a similar way, the positive effect of insider ownership on firm performance is stronger when endogeneity is not under control.

Managerial Decisions on Ownership Structure

21 Mahmood Osman Imam and Mahfuja Malik, Firm Performance and Corporate Governance Through Ownership Structure:

Evidence from Bangladesh Stock Market, International Review of Business Research Papers Vol. 3 No.4 October 2007 Pp.

88-110

22 Omar Al Farooque et al, Corporate Governance in Bangladesh: Link between Ownership and Financial Performance, Journal compilation © Blackwell Publishing Ltd. 2007

23 Juan P. Sánchez-Ballesta and Emma García-Meca, A META-ANALYTIC VISION OF THE EFFECT OF OWNERSHIP STRUCTURE ON FIRM PERFORMANCE, Journal compilation, 2007, Blackwell Publishing Ltd,

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Mohammad Abidur Rahman a.rhmn@yahoo.com

Term Paper, Department of Management Studies, Dhaka University, 2010

Yenn-Ru Chen, Yu-Lin Huang, and Chun-Nan Chen 24 (2009) find that ownership control affects both a firm’s financial condition and its investment decisions. The ownership control can show two competing effects on a firm’s financial decision, which in turn affect its investment decisions. Jensen and Meckling 25 in their article articulate the problem in ownership structure lies with agency conflicts- conflicts. An agency conflict arises when shareholders (principals) yearn for capital return but managers (agents) misappropriate shareholders’ investment. This creates agency costs as agency decision may diverge from the objective of maximization of the welfare of the principal. The implications of this misalignment of interest between principals and agents can affect a firm’s performance.

Ownership Structure and Public Announcements’ Disclosures

The actual disclosure of information heavily depends on the company’s disclosure policy, which is strongly affected by several corporate governance mechanisms, including the managers elected, management structure, remuneration principles, and ownership structure. It is supported by Laivi Laidroo 26 (2009). The results show that ownership structure has strong associations with the public announcement disclosures of companies or corporations.

Ownership Structure and Debt Policy

There is a significant impact of institutional ownership which serves as a monitoring device to mitigate agency problem between owner and principal. The institutional ownership variable has the positive predicted sign in the debt equation. However the variable has the negative predicted sign in the managerial ownership structure.

24 Yenn-Ru Chen*, Yu-Lin Huang, and Chun-Nan Chen, Financing Constraints, Ownership Control, and Cross-Border M&As:

Evidence from Nine East Asian Economies, Corporate Governance: An International Review, 2009, 17(6): 665–680

25 1Jensen and Meckling (1976, p308) delineate agency costs as the sum of (i) the cost of creating and structuring contracts between the principal and agent, (ii) the monitoring expenditures by the principal, (iii) the bonding expenditures by the agent and (iv) the residual loss.

26 Laivi Laidroo, Association between Ownership Structure and Public Announcements’ Disclosures, Corporate Governance:

An International Review, 2009, 17(1): 13–34

18

V. Finding Analysis

Mohammad Abidur Rahman a.rhmn@yahoo.com

Term Paper, Department of Management Studies, Dhaka University, 2010

Ownership Structure upon Firm Performance

M. O. Imam and M. Malik 21 (2007) has examined the underpinnings of the concept of corporate governance and provides empirical evidence on the nature of corporate governance through ownership structure in the context of Bangladesh. It does also reveal the pattern of ownership mix and ownership concentration scenario towards sponsorship in Bangladesh, the relationship between the ownership structure and firm performance and finally the impact of ownership structure upon firm’s dividend payout policy. The results presented, in this study suggest that, for Bangladeshi non-financial corporate firms, performance and sponsor ownership is negatively related and in case of the other dimensions it is positively related, but the result except foreign holding turns out to be insignificant. Firm performance and foreign holding is positively related in all equation and the relationship is nonlinear monotonic one. Basically, foreign holdings are increasing in those firms that have good governance and through these good governance practice firm will improve by doing better for all of its stakeholders. But again they found a positive relationship between institutional holding and ownership concentration on the one hand and firm performance on the other. The argument might be that in particular firms’ profitability is positively and significantly correlated with the fraction of legal person shares, suggesting that large legal person shareholders (institutional investors) have the incentive as well as the power to monitor and control the behavior of the management, and have played a significant role in corporate governance. The result is robust when indicators of both concentration and ownership mix are included in the regressions. The results are largely consistent with those of Claessens (1995) and Claessens, Djankov and Pohl (1996). Comparative studies show that in OECD countries ownership and control rights are increasingly concentrated in the hands of financial and non-financial institutions. The driving force behind this trend seems to be related to the benefit of ownership concentration as a direct measure of corporate control and other factors.

Though they could not get the chance to establish the relationship between institutional holding and firm performance but it is observed here that firm’s dividend payout ratio and institutional ownership is significantly related as role of large institutions in corporate governance is particularly important in countries where legal protection of shareholders' interest is weak for historical and institutional reasons-- a situation exists in many transition economies. Here, they also find that a large fraction of cross-sectional variation in share-holding pattern is explained by unobserved firm heterogeneity. First, it is suggested that the unobserved heterogeneity has important implications for econometric models, to estimate the effect of share-holding pattern on firm performance. Second, it is suggested that there could be endogeneity of ownership in transition economies -- it could be the case that institution owners can choose to buy shares in better performing firms, and leave all poorly performing ones in the hands of the pubic. The problem of reverse causality needs to be addressed. Does ownership affect performance or causality runs from performance to ownership?

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Term Paper, Department of Management Studies, Dhaka University, 2010

Here, political argument, inadequate legal protection for minority shareholders or private benefit of control deserves careful investigation for the explanation of the variations in ownership structure of Bangladeshi listed firms. In the context of Australia, Lamba and Stapledon 27 (2002) provide evidence that related party transactions give rise to private benefits of control and that could explain why ownership structure is concentrated in the hands of few family members. However, given the results produced by the current study, it is clear that there are many questions relating to the relationship between share holding pattern and performance of the firm, which remains unresolved. One other useful extension of this analysis would be to include additional policy variables measuring changes in the market conditions, political and legal scenario identity of the top shareholders and other dimensions to judge agency conflict. It is pertinent to know whether there exist any large non-management block-holders among the top shareholders. This is important because this block-holder could either both monitor management and help protect minority shareholders or collude with management to expropriate minority interests.

Omar Al Farooque et al 28 (2007) support M. O. Imam & M. Malik (2007) and observe a significant negative effect of board ownership, implying that higher levels of board shareholding lead to declining firm performance and vice-versa. They explained that low levels of board ownership do not provide sufficient incentive to enhance shareholder wealth. Again, at extremely high levels of board ownership, the ‘entrenchment’ effect can be observed. At this level of shareholding, neither the ‘incentive effect’ nor the ‘outside discipline’ (takeover) is effective in merging the board members’ interest with that of minority shareholders. Only the middle range of board ownership (23 per cent–60 per cent) reveals an alignment of both groups’ interest. It was expected to have a negative impact on performance considering the controlling dominance of family or founder over the firm’s overall activity. Dividend per share shows a significantly positive relationship with performance as it serves as a signal of a high quality firm. This is because in Bangladesh dividend performance is considered to be a strong indicator of financial performance and sound operational management of the firm and depend on the level of board ownership and the institutional set-up in a particular country.

Juan P. Sánchez-Ballesta and Emma García-Meca 29 find that the majority of empirical research states that if monitoring by owners improves the quality of managerial decisions, and if there are no other effects of ownership concentration, performance and concentration will be positively correlated (Shleifer and Vishny 30 , 1986). The argument is that owners wish to maximise profits, but their designated agents (managers) may have neither the interest nor the incentive to do so (Berle and Means 31 , 1932). Consequently, ownership concentration is expected to affect performance directly, mainly due to the positive effects on the incentives to

27 Lamba , A.S., and G. Stapledon, 2002, The Determinants of Corporate Ownership Structure: Australian Evidence, Working Paper, University of Melbourne. 28 Omar Al Farooque et al, Corporate Governance in Bangladesh: Link between Ownership and Financial Performance, Journal compilation © Blackwell Publishing Ltd. 2007

29 Juan P. Sánchez-Ballesta and Emma García-Meca, A META-ANALYTIC VISION OF THE EFFECT OF OWNERSHIP STRUCTURE ON FIRM PERFORMANCE, Journal compilation, 2007, Blackwell Publishing Ltd,

30 Shleifer, A. and Vishny, R. (1986) Large Shareholders and Corporate Control. Journal of Political Economy, 94, 461–488.
31

Transaction Publishers.

20

Berle, A. A. and Means, G. C. (1932) The Modern Corporation and Private Property (1991 reprint). New Brunswick, NJ:

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Term Paper, Department of Management Studies, Dhaka University, 2010

increase profits, which supports the hypothesis that large shareholders are active monitors in companies and that this monitoring helps increase the profitability of the firm (monitoring hypothesis). Nevertheless, according to agency theory, high concentration of ownership may become ineffective for taking value-maximising decisions. In this sense, some of the empirical evidence (Morck 32 et al., 1988; McConnell and Servaes 33 , 1990; Hermalin and Weisbach 34 , 1991; Claessens 35 et al., 2002) shows that at first, when ownership increases, firm value increases as well, because of the benefits of a better monitoring, but when ownership is too concentrated the value of the firm starts to decrease. These studies support the positive-alignment effect over lower ranges of ownership, and the negative entrenchment effect over higher ranges of ownership.

A number of empirical studies have also provided important insights into the relationship between firm performance and insider ownership. Despite these insights, the evidence is far from being conclusive. Concerning the proportion of shares owned by insiders, the agency theory states that when the inside ownership increases (managers and board members), the interests with outside owners are aligned (convergence-of-interests), due to the managers’ natural tendency to allocate the firm’s resources to their own best interest (Jensen and Meckling 36 , 1976), and consequently, the conflicting interests between managers and outside shareholders are likely to be solved. On the other hand, owner-managers and directors may make value reducing decisions in order to safeguard their positions in the firm, expropriating wealth from the outsiders and hence decreasing the value of the firm. Harris and Raviv 37 (1988) and Stulz 38 (1988) explain management entrenchment by arguing that managers may tend to increase leverage in order to inflate the voting power of their shareholdings, and reduce the discipline of the market for corporate control. Jensen 39 (1993) suggests that as managerial ownership increases, the likelihood of having non-executive directors diminishes because the function of these directors is to exercise potential decision control and, in addition, the board tends to oversize.

Managerial Decisions on Ownership Structure

Ownership structure of Bangladesh corporations, characterized by a voting control that is highly concentrated in the hands of families, and a large separation of their voting rights from cash flow rights, provides controlling owners with both the ability and incentive to expropriate minority shareholders. Under concentrated ownership,

32 Morck, R., Shleifer, A. and Vishny, R. (1988) Management Ownership and Market Valuation: An Empirical Analysis, Journal of Financial Economics, 20, 293–315.

33 McConnell, J. J. and Servaes, H. (1990) Additional Evidence on Equity Ownership and Corporate Value, Journal of Financial Economics, 27, 595– 612.

34 Hermalin, B. E. and Weisbach, M. S. (1991) The Effects of Board Composition and Direct Incentives on Firm Performance, Financial Management, 20(4), 101–112.

Claessens, S., Djankov, S., Fan, J. P. H. and Lang, L. H. P. (2002) Disentangling the Incentive and Entrenchment Effects of Large Shareholdings, The Journal of Finance, 57, 2741–2771.

36 Jensen, M. C. and Meckling, W. H. (1976) Theory of the Firm: Managerial Behaviour, Agency Costs, and Ownership Structure, Journal of Financial Economics, 3, 305–360.

35

37 Harris, M. and Raviv, A. (1988) Corporate Governance: Voting Rights and Majority Rules. Journal of Financial Economics, 20, 203–235.

38 Stulz, R. (1988) Managerial Control of Voting Rights: Financial Policies and the Market for Corporate Control. Journal of Financial Economics, 20, 25–54.

39 Jensen, M. C. (1993) The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems, Journal of Finance, 48, 831–880.

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Term Paper, Department of Management Studies, Dhaka University, 2010

conflicts of interest arise between controlling and minority shareholders, and the controlling shareholders’ decisions may result in the expropriation of the minority shareholders (Shleifer and Vishny, 1997; La Porta et al., 1999; Johnson et al., 2000). The owner of a corporate share is entitled to three categories of rights. First, the owner has the right of voting to deploy corporate assets, i.e., voting (control) rights. Second, she has the right to earn income, i.e., cash flow rights. Third, the owner has the right of transferring the share to another party. The ultimate owners’ incentives to expropriate minority shareholders increase as the separation of their cash flow and voting control rights becomes larger. This is because larger voting rights give the ultimate owners more power to expropriate their companies, while smaller cash flow rights reduce the owners’ share of losses from the extraction of wealth. In Bangladesh there has been a growing concern that family-dominated corporations are not responsive to minority shareholders and are unwilling to reveal their business plans and finances to outsiders. In summary, the comparison of ultimate ownership structure reveals that family controlled firms in Bangladesh on average have higher voting rights, lower cash flow rights, and greater separation of cash flow rights from voting rights than non-family controlled firms.

Yenn-Ru Chen, Yu-Lin Huang, and Chun-Nan Chen 40 (2009) find that ownership control affects both a firm’s financial condition and its investment decisions. The

ownership control can show two competing effects on a firm’s financial decision, which in turn affect its investment decisions. According to recent studies, the condition of a firm being financially constrained is related to ownership control by such specific groups as government, foreign investors, or specific insider groups

Asian

countries, family- and state-controlled firms are common (Claessens 43 et al., 2000) and most of these corporations build up their businesses in a pyramid fashion, leading to a greater degree of control over a firm than what would be proportional to the degree of ownership. Such a deviation between ownership and control motivates the controlling shareholders to pursue their own interests at the expense of minority shareholders, through intensive board participation and management appointment. Firms controlled by such special groups are thus less transparent than firms without such control. For such firms, greater information asymmetry should lead to higher external financing costs, which in turn increases the difficulty of financing investments. However, these specially controlled firms can, on the other hand, face fewer financing obstacles because they have access to external capital through their business affiliates or banks with which they have close ties (Hoshi 44 et al., 1991; Shin & Park 45 , 1999). Moreover, state-controlled corporations are less likely to experience financing obstacles because they can receive financial support from their governments and preferential treatment from state-controlled

(Beck, Demirguc-Kunt, Laeven, & Maksimovic 41 , 2006; Hobdari 42 , 2008). In

40 Yenn-Ru Chen*, Yu-Lin Huang, and Chun-Nan Chen, Financing Constraints, Ownership Control, and Cross-Border M&As:

Evidence from Nine East Asian Economies, Corporate Governance: An International Review, 2009, 17(6): 665–680

41 Beck, T., Demirguc-Kunt, A., Laeven, L., & Maksimovic, V. 2006. The determinants of financing obstacles. Journal of International Money and Finance, 25: 932–952.

42 Hobdari, B. 2008. Insider ownership and capital constraints: An empirical investigation of the credit rationing hypothesis in Estonia. Corporate Governance: An International Review, 16, 536–549.

43 Claessens, S., Djankov, S., & Lang, L. H. P. 2000. The separation of ownership and control in East Asian corporations. Journal of Financial Economics, 58: 81–112.

44 Hoshi, T., Kashyap, A., & Scharfstein, D. 1991. Corporate structure, liquidity, and investment: Evidence from Japanese industrial groups. Quarterly Journal of Economics, 106: 33–60.

45 Shin, H. H. & Park, Y. S. 1999. Financing constraints and internal capital markets: Evidence from Korean “Chaebols.” Journal of Corporate Finance, 5: 169–191.

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Term Paper, Department of Management Studies, Dhaka University, 2010

financial institutions (Harrison & McMillan 46 , 2003; Laeven 47 , 2003). In other words, the argument that a firm’s financing condition will constrain its investments due to information asymmetry does not necessarily hold in the case of family- and statecontrolled firms.

In addition to financial concerns, ownership control also has a direct impact on mergers and acquisitions (M&As) decisions due to managerial motives in control and risk-taking (Chang & Mais 48 , 2000). To avoid the dilution of controlling power, firms prefer to finance mergers with cash payment. To reduce risk-taking, management has an incentive to invest less. Relative to domestic M&As, cross- border deals are more likely associated with weaker management control due to local management and distances. Since firms controlled by families are usually concerned with corporate control, their investment decisions can be constrained by factors related to organizational structure. Chandler and Hikino 49 (1990), for instance, show that family firms have less incentive to undertake large-scale investments in distant places. Redding 50 (1990) supports this idea, arguing that family businesses are less likely to trust outsiders due to worries about managerial control and thus may not adequately apply local management within their foreign affiliates. Moreover, Jung 51 (1999) finds that family businesses generally keep their decision-making power within the family. Lin and Hu 52 (2007) show that family firms can choose a professional CEO due to operating concerns. However, when family firms have high cash-flow rights and are more likely to face expropriation, they still prefer a family member as the CEO to reduce the probability of agent entrenchment and create firm value. Thus, when it comes to cross-border M&As, family-controlled corporations often impose human resource constraints to maintain management control. Consequently, firms controlled by family groups prefer domestic M&As over cross-border M&As due to the concerns about managerial motives. Similarly, state- controlled firms are likely affected by political influences and make decisions largely based on social welfare (Nutt 53 , 2000). Thus, their investments are often restricted by regulations and managers cannot therefore have complete control over those decisions. As a result, between concerns about financing constraints and managerial motives, this study suggests that these family- and state controlled firms focus more on their control power and thus prefer domestic M&As to cross- border deals.

Claessens et al. (2000) find that separation of management and ownership control is a rare condition for Asian companies and that the control and wealth of these firms are significantly concentrated in the hands of a few families in the nine East Asian countries. As mentioned earlier, previous studies suggest that firms owned by family groups and the state can have privileged access to external financing

46 Harrison, A. E. & McMillan, M. S. 2003. Does direct foreign investment affect domestic credit constraints? Journal of International Economics, 61: 73–100.

47 Laeven, L. 2003. Does financial liberalization reduce financing constraints? Financial Management, 32: 5–34.

48 Chang, S. & Mais, E. 2000. Managerial motives and merger financing. Financial Review, 35: 139–152.

Chandler, A. D. & Hikino, T. 1990. Scale and scope: The dynamics of industrial capitalism. Cambridge, MA: Harvard University Press.
50

51 Jung, K. H. 1999. Foreign direct investment and corporate restructuring in East Asia. Pacific Review, 12: 271–290.

52 Lin, S. H. & Hu, S. Y. 2007. A family member or professional management? The choice of a CEO and its impact on performance. Corporate Governance: An International Review, 15: 1348–1362.

53 Nutt, P. C. 2000. Decision-making success in public, private, and third sector organizations: Finding sector dependent best practice. Journal of Management Studies, 37: 77–108.

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49

Redding, S. 1990. The spirit of Chinese capitalism. Berlin:Walter de Gruyter.

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Term Paper, Department of Management Studies, Dhaka University, 2010

(Harrison & McMillan, 2003; Laeven, 2003), and this type of controlling group can facilitate external funding even under financially constrained conditions. Different types of ownership control affect not only the feasibility of financing but also investment decisions due to concerns of losing control. Thus, this paper also examines the impact of ownership control on M&A activities. Such ownership control can lead to special treatment for these firms, lowering the cost of external financing. Therefore, the market participants should pay extra attention to these firms in their major corporate decisions in order to share the benefits of corporate control without too much cost.

Ownership Structure and Public Announcements’ Disclosures

The actual disclosure of information heavily depends on the company’s disclosure policy, which is strongly affected by several corporate governance mechanisms, including the managers elected, management structure, remuneration principles, and ownership structure, Laivi Laidroo 54 (2009). The results show that ownership structure has strong associations with the public announcement disclosures of listed companies. Disclosure quality was proxied with the disclosure score based on six disclosure quality attributes selected upon the basis of information theory – informativness, relevance, precision, rarity, frequency, and unexpectedness – and with two quantitative disclosure measures – number of sentences and number of announcements disclosed. Public announcement disclosure quality showed statistically significant negative association with ownership concentration and foreign ownership, and positive association with institutional ownership as expected. Block holder, foreign, and institutional ownership were also economically significant determinants of disclosure on these three markets. In terms of other company characteristics, strong support was found for positive association with sales growth and size of entry barriers, with lower support to a positive association with profit after tax to sales. In sum, the main theoretical contribution of this paper is that it presented possibilities for employing information theory in the context of finance for determining possible disclosure quality attributes. Considering that public announcements capture only a part of total disclosure and possibilities for defining disclosure quality have remained largely unexplored, a future study could investigate the possibilities of defining it in the context of overall disclosure. In terms of empirical implications, the importance of ownership structure in determining the public announcement disclosure policy was supported. This is in line with previous research conducted in the context of financial reports and overall disclosure. The results also showed that the impact of ownership variables on disclosure is dependent on the ownership structures of companies included in the sample (as has also been shown by previous empirical studies). It means that the increase in the level of ownership concentration decreases disclosure as the holdings of certain shareholder groups exceed a threshold level. Based on this notion more effective regulative enforcement is needed to improve the overall disclosure policy of firms with more concentrated ownership structures. This should enable to improve the protection of interests of shareholders with smaller stakes in companies, and if the expectations of information economics hold, lead to the

54 Laivi Laidroo, Association between Ownership Structure and Public Announcements’ Disclosures, Corporate Governance:

An International Review, 2009, 17(1): 13–34

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Term Paper, Department of Management Studies, Dhaka University, 2010

reduction of agency costs and information asymmetries between shareholders. From the viewpoint of shareholders being the residual claimants of the firm, corporate governance refers to mechanisms by which the suppliers of finance control managers in order to ensure satisfactory return on their investment (Shleifer and Vishny 55 1997).

Ownership Structure and Debt Policy

There is a significant impact of institutional ownership which serve as a monitoring device to mitigate agency problem 56 (Relationships in which the principal and agent have partly differing goals and risk preferences (e.g. compensation, regulation, leadership, impression management, whistle blowing, vertical integration, transfer pricing)) between owner and principal. The institutional ownership variable has the positive predicted sign in the debt equation. However the variable has the negative predicted sign in the managerial ownership equation. The exhibition of positive sign in the debt equation confirm the contention that firm which have good monitoring system may employ higher level of debt financing as debt covenant may discipline the manager opportunistic behaviour in the event of strategic decision making. It is consistent with Jefferis (1988) and Agrawal and Mandelker 57 (1990) who argued that investors especially block-holders provide valuable monitoring services and act as a restrain to opportunistic behavior of managers. The finding of negative and significant association between managerial ownership and debt policy suggest that higher debt policy discourage managerial ownership. Hence debt policy serves as monitoring substitute to reduce agency problem. It could be further explained that the managerial ownership proportionately decrease as debt level increase at the presence of higher institutional ownership which serves as monitoring substitute in limiting transfer of wealth from debt holders to shareholders. There is a negative and significant relationship between institutional ownership and managerial ownership. This can be argued that as the managerial ownership decreases proportionately as the level of institutional ownership increases. It is becasue institutional ownership fosters additional monitoring and acts as a restraint to the opportunistic behavior on the part of managers. Consequently, the need to utilize managerial ownership to control agency costs is lessened. The finding is consistent with the finding of Agrawal and Mandelker (1990). The institutional ownership which is always come in large blocks may be more capable of monitoring and controlling the management thereby perhaps contributing to corporate performance. This is finding is same as found by Shliefer and Vishny 58 (1986). Thus the results support the notion that institutional investors serve as effective monitoring agents and help in mitigating agency costs.

Ownership Structure with other effect (Pension Reforms)

Mariassunta Giannetti 59 in Sweden attempts to evaluate the effects of pension reforms and institutionalized saving on ownership structure and corporate

55 Shleifer, A. and Vishny, R. W. (1997) A survey of corporate governance, Journal of Finance, LII, 737– 783.

56 http://www.istheory.yorku.ca/agencytheory.htm

57 Agrawal, A. and G. N. Mandelker, (1990). Large Shareholders and Monitoring of Managers: The Case of Antitakeover Charter Amendments. Journal of Financial and Quantitative Analysis (June), 143-161.

58 Shleifer, A. and R. Vishny, (1986). Large Shareholders and Corporate Control. Journal of Political Economy (June), 461-

488.

59 Mariassunta Giannetti, Pension Reform, Ownership Structure, and Corporate Governance: Evidence from Sweden, 2006

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Term Paper, Department of Management Studies, Dhaka University, 2010

governance. He tried to explore how substantial changes in institutional ownership structure affect firm valuation and corporate policies specially pension reform. In Bangladesh we don’t see any articles regarding the policies in corporate governance. We need more study for further explanation.

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Mohammad Abidur Rahman a.rhmn@yahoo.com

Term Paper, Department of Management Studies, Dhaka University, 2010

VI. Recommendations

In Bangladesh, corporate governance implication is the greatest challenge for the authority. However, some practices also going on regarding corporate governance. Here the some recommendations for Bangladeshi corporate in the shed light of UK, USA and Indian literature regarding corporate governance practices through ownership structure is as follows:

1. Ownership should be 23 per cent–60 per cent to reveals an alignment of both groups’ interest that will improve the farm’s performance in all arena.

2. The institutional ownership should come in large blocks to be more capable of monitoring and controlling the management thereby perhaps contributing to corporate performance.

3. Company’s disclosure policy should be user friendly of public announcement disclosure that will remove the barrier to pass information timely, accurately & reliably.

4. Formation of corporate structure of a corporation should be avoided by enrollment of family members.

5. Accounting standards, audit and disclosure should be fair, impartial and transparent.

6. Annual General Meeting (AGM) should do at regular interval in presence of regulatory authorities.

7. Auditors in Bangladesh should be given freedom to prepare true report of the financial statements of corporate entities.

8. OECD principles should effectively implemented at every level of the corporation.

VII. Conclusion

This study analyses the link between ownership structure with financial performance through public disclosures, managerial decisions, dividend payout policy etc for firms in Bangladesh, based on ownership being viewed as exogenous and endogenous. While the evidence on the ownership-performance relationship is mixed, it clarifies the role of corporate governance in improving corporate performance. This mono-directional relationship indicates that the incentives for monitoring change significantly as ownership stakes rise beyond a particular threshold. This means that initially the board lacks incentives to increase firm performance and eventually they become entrenched and perform poorly thereby negatively affecting performance. Other governance and control variables are in the expected direction in their relation with firm performance. Institutional shareholdings have a significantly negative effect on performance at lower levels of ownership due to lack of incentives, but later become positive only for the middle range of board ownership (23 per cent–60 per cent). Under concentrated ownership, conflicts of interest arise between controlling and minority shareholders and the controlling shareholders’ decisions may result in the expropriation of the minority shareholders. The empirical evidence regarding the relationship between ownership structure and firm value is mixed, providing very little in the way of consistent results. In summary, the comparison of ultimate ownership structure reveals that family controlled firms in Bangladesh on average have higher voting

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Term Paper, Department of Management Studies, Dhaka University, 2010

rights, lower cash flow rights, and greater separation of cash flow rights from voting rights than non-family controlled firms.

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References:

Mohammad Abidur Rahman a.rhmn@yahoo.com

Term Paper, Department of Management Studies, Dhaka University, 2010

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Term Paper, Department of Management Studies, Dhaka University, 2010

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