Ownership Structure and Corporate Performance: Bangladesh

Ownership Structure and Corporate Performance: Evidence from Bangladesh

Omar Al Farooque,a* Tony van Zijl,b Keitha Dunstanc and AKM Waresul Karimd

a b, c, d

University of New England

Victoria University of Wellington

Abstract This paper models the corporate ownership and performance relationship in Bangladesh listed firms using a simultaneous equations approach. Consistent with contemporary literature a “reverse-way” causality relationship between the two is documented. Using an unbalanced pooled sample of 660 firm-years, our results suggest that ownership does not have a significant impact on performance (Tobin’s Q or ROA). However, performance does appear to have a significant negative impact on ownership. With few exceptions, other governance and control variables appear to have significant effects on both performance and ownership. These results imply that despite significant governance differences between Bangladesh and developed market economies there are strong similarities in “internal governance mechanisms” and the implications of agency theory. JEL Classification: G32, G34 Keywords: Emerging markets, board ownership, financial performance, endogeneity, reverse-way causality

1. Introduction The nature of the relationship between ownership and financial performance is a key issue for governance. Some corporate governance studies support the existence of a linear or monotonic relationship between ownership and performance (Berle and Means, 1932; Jensen and Meckling, 1976; Lichtenberg and Pushner, 1994; Mehran, 1995),

* Corresponding author: Omar Al Farooque, Lecturer, School of Business, Economics and Public Policy, University of New England, Armidale NSW2351, Australia. Tel: +61 26773 2201 Fax: +61 26773 3148 E-mail: ofarooque@une.edu.au, omaral.farooque@gmail.com.

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Omar Al Farooque, Tony van Zijl, Keitha Dunstan and AKM Waresul Karim Asia-Pacific Journal of Accounting & Economics 14 (2007) 127–150

while others support a...