CORPORATE GOVERNANCE IN BANGLADESH 1453

Corporate Governance in Bangladesh:

Link between Ownership and
Financial Performance
Omar Al Farooque,* Tony van Zijl, Keitha Dunstan
and AKM Waresul Karim

This paper investigates empirically the effect of board ownership on firm performance
in Bangladesh. By estimating single equation and simultaneous equation models on an
unbalanced pooled sample of listed firms, it offers some new insight into the ownership-
performance link in Bangladesh. Building on extant literature, it examines the ownership-
performance relationship in an emerging market economy considering ownership as
exogenous and as endogenous. The latter approach is favoured as recent empirical evidence
shows that ownership and performance are endogenously determined and there is either a
reverse-way or two-way causality relationship between the two. While OLS regression analy-
sis indicates a linear and non-linear relationship between board ownership and performance,
this disappears when 2-SLS estimation of a simultaneous equation model is carried out.
Instead, a reverse causality relationship emerges. Other governance and control variables
appear to have effects consistent with the literature. These results suggest a need to strengthen
the internal control mechanisms within listed firms in Bangladesh.

Keywords: Emerging markets, board ownership, financial performance, exogeneity, endoge-

neity, mono-directional non-monotonic causal relation, reverse-way causality

Introduction mechanisms differ between countries, par-

ticularly between developed and emerging

W ith closer integration of markets around

the world, the importance of corporate
governance practices in emerging economies is
increasingly evident to domestic as well as
international agencies. To attract a steady flow
of foreign financial resources towards these
economies, there is an increasing global market
pressure on them to reduce risks to investors
and hold down the cost of capital (World Bank
1999). Improved governance can go a long way
in meeting such investor expectations by con-
siderably reducing waste and misallocation of
resources.
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 1997). These
economies. Emerging markets differ sub-
stantially from developed economies in their
institutional, regulatory and legal environ-
ments (Prowse 1999). Bangladesh is an
emerging market economy striving for eco-
nomic growth. In recent years corporate gov-
ernance has emerged as an important issue
for Bangladesh due to the ongoing effects of
globalisation, as the domestic economy inte-
grates with the global economy and firms
strive to gain international competitiveness.
Economic liberalization carried out so far has
opened the door for both foreign direct and
portfolio investment as well as local institu- *Address for correspondence:
School of Business, Economics
tional investors. Therefore, it has become and Public Policy, Faculty of
essential to revisit the existing governance Professions, University of
system to examine its effectiveness and New England, Armidale, NSW
2351, Australia. Tel: +61 2 6773
suggest ways to bring about changes if 3920; Fax: +61 2 6773 3148;
necessary. E-mail: ofarooqu@une.edu.au

© 2007 The Authors

Journal compilation © 2007 Blackwell Publishing Ltd, 9600 Garsington Road,
Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA Volume 15 Number 6 November 2007
1454
This study examines the relationship
between ownership, as a governance mecha-
nism, and corporate performance in Bang-
ladesh. In an earlier study (Farooque et al. 2007),
the authors have considered the ownership-
performance relationship assuming endogene-
ity of the two and using data for 1995–2001 with
performance measured as Tobin’s Q or Return
on Assets (ROA). The present study extends
this work by considering both ownership and
performance variables as exogenous and
endogenous in an enlarged data set for 1995–
2002, and measuring performance instead by
the market to book value of equity (MBVE).
Board ownership represents the shareholdings
of all members of the board of directors, execu-
tive and non-executive, and financial perfor-
mance (i.e., shareholders value/firm value)
is a function of production costs and other
kinds of transaction costs caused by imper-
fect managerial exchanges, institutions and
environmental/behavioral conditions as pre-
scribed by the agency theorists. Given the
noted differences between systems of gover-
nance practiced in emerging and developed
economies, the research interest is whether the
observed relationship between ownership and
performance in developed countries holds in
a country like Bangladesh with a different
system of governance. The objective is to reveal
whether existing corporate governance mecha-
nisms, in particular internal mechanisms,
improve financial performance in Bangladesh
in a way consistent with those found in devel-
oped economies. Having no comprehensive
prior empirical study on Bangladesh corporate
governance, an analysis of the effectiveness of
corporate governance systems in Bangladesh is
considered meaningful in order to redress the
gap in the relevant literature. It offers new
insights into corporate governance practices in
Bangladesh and underlines the need for reform
in this area. The remainder of the paper is orga-
nized as follows: Section 2 describes existing
corporate governance practices in Bangladesh.
Section 3 deals with existing literature and
Section 4 focuses on research method, models
and data used. Section 5 describes empirical
evidence while Section 6 concludes with the
findings of the study.
Scenario of Corporate Governance
Practices in Bangladesh
Bangladesh emerged as an independent
country on the 16th of December 1971. The
country is located in the South Asian region
and is neighboured by India and Myanmar
from all sides except for the Bay of Bengal
in the south. A capitalist form of economy
Volume 15 Number 6 November 2007
CORPORATE GOVERNANCE
began to flourish in Bangladesh during the
period prior to independence and continued
in the post-independence period but with a
4-year interruption during 1972 to 1975. This
period saw fundamental change in the coun-
try’s economic policy in the model of a social-
ist framework. Following a reversal in the
policy of state ownership of the corporate
sector in 1975, a massive de-nationalization
strategy of public enterprises has been
carried out, with the exception of large-scale
enterprises. Moves toward private sector-led
industrialization sharply turned the economic
wheel from a ‘socialist’ to a ‘mixed’ economy
followed by a ‘market’ form of economy. At
present, the corporate sector of Bangladesh
comprises a few large-scale state owned
enterprises (SOEs), a large number of priva-
tised and privately owned firms, joint-
ventures and multinational firms. Among the
different types of firms, SOEs are not listed
on the stock exchange and have government-
controlled governance systems different from
those of listed firms. The scope of this study
is limited to listed firms only, which includes
both financial and non-financial firms and
firms with significant degrees of public, and
private or foreign ownerships.
Microstructure of Corporate Governance
Institutions in Bangladesh
Institutions play a crucial role in shaping gov-
ernance. It is argued that a sound institutional
framework is a precondition for good gover-
nance. A strong institutional set up can foster
accountability, transparency, equity and
fairness. The institutional framework of the
country comprises both capital market and
regulatory institutions. In Bangladesh the
capital market institutions are Dhaka Stock
Exchange (DSE), Chittagong Stock Exchange
(CSE), Securities and Exchange Commission
(SEC), central bank (Bangladesh Bank) and
other financial institutions, Institute of Char-
tered Accountants of Bangladesh (ICAB) and
audit firms. The main components of the regu-
latory framework are the Companies Act 1994,
Securities and Exchange Commission Act
1993, Bangladesh Bank Order 1972, Bank
Companies Act 1991, Financial Institutions
Act 1993, Insurance Act 1938, Income Tax
Ordinance 1984, DSE and CSE listing rules,
and the system of accounting and auditing
standards.
Corporate Governance Practices
in Bangladesh
The corporate governance system in Bang-
ladesh is a hybrid of outsider-dominated
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
CORPORATE GOVERNANCE IN BANGLADESH
market-based systems (market or compliance-
based model of the US and the UK) and
the insider-dominated bank-based systems
(control or relationship-based model of
Germany and Japan). Corporate firms are
characterized by the dominance of internal
governance mechanisms (direct measures) of
control and weak and ineffective external
governance mechanisms (indirect measures).
Some of the institutional features of Bang-
ladesh include a less developed capital
market, an at least weak-form efficient stock
market (Islam and Khaled 2005), absence of an
active market for corporate control, generally
concentrated ownership, high reliance on bank
financing, a passive managerial labour market,
and poor incentive contracts for management.
The economic negligence experienced by the
country under the British colonial rule for
nearly two centuries has been a significant
contributor to the poor institutional and cor-
porate base. As a result, the corporate environ-
ment in Bangladesh lacks an effective market
based corporate governance system. Although
broadly categorised as a common-law country,
Bangladesh has a relatively unsophisticated
legal and regulatory framework. Problems of a
weak regulatory regime are further aggravated
by poor enforcement of whatever laws and
statutes exist to secure satisfactory outcomes.
Similarly, market incentives are poor due to
the presence of market anomalies and mal-
practices. As a consequence, transparency and
accountability at the corporate level remain
inadequate. In the absence of market-based
monitoring and control measures, ownership-
based monitoring and control have been estab-
lished in Bangladesh as a core governance
mechanism.
The financial reporting environment in
Bangladesh (i.e., general disclosure frame-
work in accounting and auditing) is not in full
conformity with international standards. In
fact, financial disclosure is made primarily to
satisfy tax authorities rather than meet the
needs of investors and markets do not neces-
sarily reward more transparent firms. The
Securities and Exchange Commission (SEC)
in Bangladesh has made it mandatory for
listed companies to comply with International
Accounting Standards (IASs/IFRSs) and Inter-
national Standards on Auditing (ISAs) as
applicable in Bangladesh (i.e., Bangladesh
Accounting Standards [BASs] and Bangladesh
Standards on Auditing [BSAs]). So far Bang-
ladesh has adopted all but four IASs and two
IFRSs and thirty five ISAs. With respect to the
reliability and comparability of financial infor-
mation, it can be said that the general level of
compliance of Bangladesh firms to Interna-
tional Accounting Standards (as adopted in
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
1455
Bangladesh) is at best satisfactory (Karim and
Ahmed 2005).
The corporate sector in Bangladesh is pre-
dominantly owned and controlled by founder
families or groups of families or foreign
owners. The prevalence of family-owned busi-
nesses, together with state ownership, thus
plays a significant role. Listed companies are
not free from this prototype of governance,
fittingly called ‘family capitalism’ or ‘crony
capitalism’ (Asian Development Bank 2003).
Under the Companies Act 1994, a maximum of
50 per cent of the total issued capital can be
retained by sponsor directors (i.e., the promot-
ers of the company who also act as directors
until the first directors are elected) while going
public. The remaining portion is distributed
to general public, financial institutions, non-
resident Bangladeshis and employees of
issuing companies. Therefore, the ownership
structure has evolved as a dominant mecha-
nism of governance. On average, the five
largest shareholders hold more than 50 per
cent of ordinary shares. In most cases they are
family owners, major individual owners and
domestic or foreign companies. Corporate
governance practices are typically tailored to
suit the needs of these core owners. Families
therefore have extensive influence on the
decision-making process. Most of the compa-
nies have executive directors, the CEO and the
Chairperson from controlling families. In most
firms, an owner director also acts as the CEO
(except for financial institutions).
Corporate boards generally lack indepen-
dence due to founder-family control, with
minimal representation of minority sharehold-
ers and institutional investors. Boards per se
have never been central to corporate gover-
nance in Bangladesh. Dominant shareholding
families have treated boards as conduits for
implementing their agenda. It is said that
important decisions involving company affairs
are made at family meetings and such deci-
sions are given a stamp of approval in board
meetings merely to ensure that the legal
requirements under the Companies Act are
met (Asian Development Bank 2003). The
intertwining of management and the board
reduces the opportunities for the board to
prevent insider dealing and preferential treat-
ment. Minority shareholders’ rights are largely
ignored or suppressed. Even non-executive
directors fail to give independent judgement
in enhancing corporate wealth for all share-
holders, as the nominees tend to have business
or social connections with the controlling
shareholder group (Asian Development Bank
2003). The above features of the corporate
firms create the inevitable conflict between
dominant shareholder(s) and minority share-
Volume 15 Number 6 November 2007
1456
holders, as indicated by Williamson (1979),
Grossman and Hart (1980), Fama and Jensen
(1983) and Shleifer and Vishny (1986). Oman
et al. (2003) contend that the key potential con-
flict of interest in developing, transition and
emerging market countries (like Bangladesh)
tends to arise, not between managers and
shareholders like the US and the UK, but
between controlling shareholders and other
shareholders on the one hand, and other
investors, on the other. There are plenty of
opportunities for controlling shareholders to
expropriate wealth from outside shareholders.
This is central to the quality of corporate
governance in Bangladesh impacting firm
performance as predicted by agency theory.
The above discussion of business owners’
culture in Bangladesh highlights extensive
family control over corporate firms. This own-
ership structure is by no means similar to the
pyramidal structure found in Japan and some
other East-Asian countries. Most of the fami-
lies in Bangladesh hold shares independently
in a particular company or group of companies
that they control. Except for one company
group, there is no existence of a ‘holding
company’ in other groups of companies. Even
the holding company of that particular group
does not own majority shares in the sister
companies within the group. Although a few
cross shareholdings are found in some of the
company groups, that is not a common feature
of ownership of listed firms in Bangladesh.
Literature Review
Corporate governance literature on ownership-
performance relationship falls into two broad
streams – one that ownership is an exogenous
variable, and the other that ownership is an
endogenous variable. Assuming ownership to
be exogenous, the first stream of studies pro-
vides evidence of a ‘mono-directional’ or ‘one-
way causality’ relationship running from
ownership to performance. Using OLS estima-
tion, these studies report a linear as well as a
non-linear relationship between ownership
and performance. A monotomic increasing
relationship between ownership and perfor-
mance suggests that firm performance is an
increasing function of the extent of board
shareholding, which is consistent with
incentive-alignment hypothesis (Berle and
Means 1932; Jensen and Meckling 1976).
On the other hand, a non-monotonic rela-
tionship between the two variables suggests
that firm performance initially increases up to
a certain level of board shareholdings, then
decreases as ownership increases up to an-
other level and finally increases with further
increases in board ownership. This means that
Volume 15 Number 6 November 2007
CORPORATE GOVERNANCE
the relationship between ownership and per-
formance is not always a direct one. The rela-
tionship may be in fact being negative at
higher levels of ownership. This negative asso-
ciation is consistent with the entrenchment
hypothesis (Fama and Jensen 1983; Morck et al.
1988). Stulz (1988) presents a formal model
predicting a non-linear (i.e., bell or roof-
shaped) relation between managerial owner-
ship and financial performance. Performance
is expected to improve as ownership increases
from the lowest level possible (zero percent).
However, it starts to decrease after a certain
high level of ownership and reaches a
minimum when managers own 50 per cent or
more of the shares of the firm. Therefore, the
contrasting approaches imply that increased
managerial ownership either improves mana-
gerial incentives, thereby enhancing firm
value, or leads to entrenchment, and thereby
decreasing firm value. A number of studies
provide mixed results that support both
the incentive-alignment and entrenchment
hypotheses. This suggests that the studies that
predict only monotonic relationship may be
mis-specified as incentive-alignment, i.e., con-
vergence of interest effect, does not seem to
exist throughout all levels of ownership.
Lichtenberg and Pushner (1994) find that
board ownership has a significant positive
relationship with performance, while other
types of ownership show mixed results.
Mehran (1995) finds that firm performance is
positively related to the percentage of equity
held by managers and the percentage of equity
and stock options held by CEOs. Also firms
with more outside directors tend to offer more
equity-based compensation than firms with
high percentages of inside shareholdings or
outside block-holdings. Xu and Wang (1999)
provide similar evidence where ownership
concentration and ownership mix have signifi-
cant positive performance effect. Randoy and
Goel (2001) also report that high levels of
inside ownership have a positive impact on the
performance of founding family firms. Mitton
(2002) reveals that largest block-holder and all
other shareholder concentration variables are
significantly positively associated with stock
return. On the other hand, Agrawal and Man-
delker (1990) provide evidence of a negative
association between ownership and perfor-
mance. Boyle et al. (1998) find evidence of
insider entrenchment revealed in a negative
relation between insider ownership and anti-
takeover provisions, at low levels of owner-
ship but not at higher levels. Jensen and
Murphy (1990) and Slovin and Sushka (1993)
also report similar findings.
In contrast to the above studies, Morck et al.
(1988), for the first time, reported a non-linear
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
CORPORATE GOVERNANCE IN BANGLADESH
relationship between ownership and perfor-
mance at different levels of ownership. They
find that performance improves at 0 per cent–5
per cent management ownership levels.
However, it deteriorates at 5 per cent–25 per
cent ownership levels before turning to
improve again at 25 per cent and higher own-
ership levels. A number of studies find the
same form of non-linear relation as found by
Morck et al. (1988). They include Wruck (1989),
Lichtenberg and Pushner (1994), Hubbard and
Palia (1995), Kole (1996), Cho (1998), Himmel-
berg et al. (1999), Holderness et al. (1999), Short
and Keasey (1999), Xu and Wang (1999), Nagar
et al. (2000), and Sarkar and Sarkar (2000).
Other studies find a different form of non-
linear relationship, not consistent with Morck
et al. (1988). Belkaoui and Pavlik (1992) support
a non-monotonic relationship, but not the one
found in Morck et al. (1988). Rather, they find a
significant negative relationship between per-
formance and managerial ownership at a low
range (0 per cent–5 per cent) of ownership, a
positive relation at the middle range (5 per
cent–25 per cent) but negative relation at levels
higher than 25 per cent. Hermalin and Weis-
bach (1991) find a significantly positive rela-
tionship between performance and CEO
ownership at 0 per cent–1 per cent ownership
level but a significantly negative relationship
at levels greater than 20 per cent. Prevost et al.
(2002) also provide evidence of a significantly
negative relationship at a low range (0 per
cent–1 per cent), a positive one at the middle
range (5 per cent–20 per cent) and a negative
one again at levels higher than 20 per cent
ownership levels. Neumann and Voetmann
(1999) show improving firm performance as
ownership increases from 0 per cent to 5 per
cent, but not thereafter. They report a constant
level of firm performance as ownership
increases from 5 per cent to 20 per cent and a
decreasing trend in performance as ownership
increases over 20 per cent. Mathiesen (2002)
presents a significantly increasing trend of
performance when managerial ownership is in
0 per cent–0.5 per cent range, while no signifi-
cant effect can be observed at other ranges of
ownership.
Chen et al. (1993) report a non-linear relation
where performance rises at ownership levels
of 0 per cent to 5 per cent/7 per cent and falls
between 10 per cent and 12 per cent range.
Beyond this range, performance continues to
fall in one cross-sectional sample but starts to
rise in two other cross-sectional samples.
Similarly, Short and Keasey (1999) show a
non-monotonic relationship between firm
performance and managerial ownership. They
suggest that performance is positively related
to managerial ownership in 0 per cent–
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
1457
12 per cent and above 41 per cent levels, but is
negatively related in 12 per cent–41 per cent
range. Fernandez and Gomez (2002) present
a non-linear relationship on an accounting-
based performance measure. However, they
cannot confirm the same relationship on a
market-based performance measure. Mc-
Connell and Servaes (1990) provide evidence
of a curvilinear (reverse U-shaped) relation-
ship between ownership and performance at
different ranges of ownership with an inflec-
tion point between 40 per cent and 50 per cent.
The value of the firm initially increases at man-
agement ownership levels up to 40 per cent–50
per cent but then decreases as ownership gets
concentrated in the hands of insiders. A
number of studies confirm this curvilinear
relationship, including Keasey et al. (1994),
Agrawal and Knoeber (1996), Steiner (1996)
and Bohren and Odegaard (2001). Due to the
influence of convergence of interest and
entrenchment effects, it is not possible, a priori,
to predict the exact nature of the relationship at
any level of managerial ownership. Thus,
while maintaining the assumption that owner-
ship is exogenous, empirical evidence shows a
diverse range of non-linear relationships at
different levels of ownership across the world.
None of the above-mentioned empirical
research assumes that ownership is endog-
enous. Assuming instead that ownership is
endogenous and thus using a simultaneous
equations framework, the second stream of
studies provides evidence of ‘no’, ‘reverse-
causality’, and ‘bi-directional’ or ‘two-way cau-
sality’ of the relationship between ownership
and performance. Demsetz (1983) argues that
there should be no systematic relationship
between variations in ownership and firm per-
formance as ownership levels depend on
the economic rationale of ‘natural selection’
or ‘mutual neutralization’. However, due to
‘imperfect market system’ and ‘incomplete
firm contract’, subsequent studies have argued
that there must be a relationship between
ownership and performance, which is not nec-
essarily a mono-directional one running from
ownership to performance. Their arguments
depend on the economic rationale of the
‘reward’ and/or ‘insider reward’ and/or
‘insider investment’ argument (Kole 1996;
Loderer and Martin 1997; Cho 1998). In either
situation, based on simultaneity of ownership
and performance, this stands against the
conventional theoretical predictions (agency
theory) of incentive-alignment and entrench-
ment hypotheses.
In terms of empirical evidence, Demsetz and
Lehn (1985) show that there is no significant
relationship between concentrated ownership
and performance. Agrawal and Knoeber (1996)
Volume 15 Number 6 November 2007
1458
find no relationship between performance and
inside ownership. Himmelberg et al. (1999) also
find no meaningful relation between man-
agerial ownership and firm performance,
after controlling for a firm’s ‘fixed effects’ (i.e.,
unobserved firm heterogeneity) under OLS
measures. Their results cast doubt on the
assumption that managerial ownership is
exogenous in models that attempt to measure
the impact of ownership on performance. On
the other hand, recent studies mostly present
evidence of a reverse-causality or a two-way
causality between managerial equity owner-
ship and performance, applying a simulta-
neous equations framework. Kole (1996)
reports a reverse-causality that performance is
a determinant of managerial ownership, not
vice-versa. Loderer and Martin (1997) argue
that the notion derived from OLS regression
results, that higher ownership fosters better
performance, is biased and subject to a ser-
ious identification problem. Considering both
performance and managerial ownership as
endogenous, they find no evidence that larger
managerial ownership boosts performance. In
contrast, performance appears to be a signifi-
cant negative predictor of management share-
holding. They show that at high performance,
management holds fewer shares or liquidates
part of their shareholding, particularly when
their human capital is firm specific. This con-
firms the existence of a relationship whereby
firm performance is argued to drive manage-
rial ownership.
Cho (1998) tests the hypothesis that insider
ownership affects investment, which, in turn,
affects corporate value. However, after con-
trolling for endogeneity, he finds that perfor-
mance is a positive predictor of ownership,
but ownership cannot predict performance.
Demsetz and Villalonga (2001) using a simul-
taneous equations model show no statistically
significant relationship between performance
and managerial or Top 5 shareholders’ owner-
ship, but a significant negative influence of
performance on managerial ownership. That
is, contrary to expectation, management seems
to hold fewer shares when the firm is doing
well, as also found in Loderer and Martin
(1997). Bohren and Odegaard (2001) present
evidence that the insider ownership coefficient
is not significant in the performance equation,
while the performance coefficient is clearly
significant and positive in the insider owner-
ship equation. This implies that the causation
seems to be reversed.
Unlike the studies above-mentioned, Chung
and Pruitt (1996) find a two-way causality
between ownership and performance. Their
results show a strong positive association
between executive ownership and firm value
Volume 15 Number 6 November 2007
CORPORATE GOVERNANCE
in both directions. That is, both the ownership
and performance variables appear to mutually
drive each other. More specifically, they find
that CEO equity ownership positively influ-
ences firm performance measure and at the
same time the former is determined by the
latter. This study confirms a bi-directional rela-
tionship between the two variables. Thus, the
evidence presented in this section by the above
two groups of studies ranges from a signifi-
cant ‘one-way’ (unidirectional) relationship to
‘no’, ‘reverse-way’ and ‘two-way’ (bidirec-
tional) relationship between ownership and
performance. Taking into account the sound-
ness of methodology and sophistication of
analytical tools used, the assumption owner-
ship is endogenous appears to be more plau-
sible. Put differently, managerial ownership
and firm performance are likely to be interde-
pendent and jointly determined. The present
study relies more on the assumption that own-
ership is endogenous than that it is exogenous,
although it tests both streams of research on
the sample firms.
Hypothesis Development,
Methodology, Data and the Models
For the first line of research, we develop a
linear and cubic-form OLS regression model
to estimate the effect of ownership on perfor-
mance, as measured by market-to-book value
of equity ratio. The aim is to examine whether
a ‘linear’ or a ‘non-linear’ relationship exists
between board ownership and performance.
We thus test the following null hypothesis:
H1: Firm performance is not a function of
board ownership.
Model 1:
LOG-MBVE-Ratio i =
β0 + β1 BD-SHAREi + β 2 ( BD-SHAREi )2
+ β 3 ( BD-SHAREi )3 + β 4 INST-SHAREi
+ β 5 (INST-SHAREi )2
+ β6 NON-EXE-DIR-Ratioi
+ β7 BD-SAL i (Spline-1) + β8 BD-SAL i (Spline-2)
+ β9 BD-SAL i (Spline-3 ) + β10 DPS i
+ β11 CEO-DUM i + β12 CEO-CHAIR-DUAL-DUM i
+ β13 CEO-TENUREi + β14 BIG-4 AUDIT-DUM i
+ β15 DEBT-Ratio i + β16 LOG-SALES i
+ β17 INVEST-Ratioi + β18 ADVER-Ratioi
+ β19 EARN-VOLATILEi + ε i
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
CORPORATE GOVERNANCE IN BANGLADESH 1459

And variables of interest of the model are ‘board

ownership percentage’ as a measure of owner-
29 26
ship and ‘market-to-book value of equity ratio’
∑ β IND-DUM
j i or ∑ β YEAR-DUM
j i
as a measure of performance. Log transforma-
j = 20 j = 20
23
tion of the performance measure is carried out
or ∑ β TYPE-DUM
j i
to ensure the variable is approximately normal
and to reduce the impact of outliers. Other
j=20
commonly used governance and control vari-
For the second line of research, a simultaneous ables are used in the models. The regression
equations model is developed, containing both model developed here has been tested for
performance and board ownership equations. ‘multi-collinearity’, ‘auto-correlation’, ‘het-
The aim is to examine whether a ‘reverse- eroskedasticity’, ‘stability’, ‘outliers’, ‘good-
causality’ exists between board ownership ness of fit’ and/or ‘normality’.
and performance, whereby performance de- The study is based on a sample of 723 firm-
termines board ownership rather than board years covering 8 years from 1995 to 2002. The
ownership determining performance. We thus sample is an unbalanced pooled sample of
test the following null hypothesis: Dhaka Stock Exchange listed firms produced
by a thorough screening of 1413 firm-years. It
H2: There is no relationship between own- covers all listed financial and non-financial
ership and firm performance in either firms, with 73 firms in 1995, 63 firms in 2002 and
direction. approximately 100 firms in the other years. All
Model 2: financial and non-financial data were manually
collected from the annual reports of the respec-
Performance Equation: tive firms for each year. Stock price data (year-
end) was obtained from the DataStream
LOG-MBVE-Ratio i = database. Stock price data for a number of firms
β0 + β1 BD-SHAREi + β 2 INST-SHAREi were not available in Data Stream, for which
data was collected from DSE Monthly Reviews,
+ β 3 (INST-SHAREi )2 a monthly bulletin published by Dhaka Stock
+ β 4 NON-EXE-DIR-Ratioi Exchange. For listed firms, annual reports are
+ β 5 BD-SAL i (Spline-1) + β6 BD-SAL i (Spline-2) largely audited by external audit firms and have
generally been approved by the Securities and
+ β7 BD-SAL i (Spline-3 ) + β8 DPS i Exchange Commission (SEC). Therefore, infor-
+ β9 CEO-DUM i mation produced in company annual reports
are taken as reliable and comparable. In case of
+ β10 CEO-CHAIR-DUAL-DUM i any doubts about the information presented in
+ β11 CEO-TENUREi + β12 BIG-4AUDIT-DUM i financial statements, the SEC is empowered to
+ β13 DEBT-Ratioi + β14 LOG-SALES i carry out special audits by its appointed audi-
tors. Only a few companies in Bangladesh have
+ β15 INVEST-Ratioi + β16 ADVER-Ratioi subsidiaries and preparation of consolidated
+ β17 EARN-VOLATILEi + ε i financial statement was not mandatory in Bang-
ladesh in the sample period of this study. In
Ownership Equation: those cases, parent company’s financial state-
ments have been used as the source of the
BD-SHAREi = necessary information. Therefore, subsidiary
β0 + β1LOG-MBVE-Ratioi + β 2 INST-SHAREi or consolidated financial statements have not
been used in this study.
+ β 3 PUB-SHAREi + β 4 GOV-SHAREi The descriptive statistics displayed in
+ β 5 BD-SIZEi + β6 FIRM-AGEi Table 2 show that the mean (median) MBVE
+ β7 CEO-TENUREi ratio is 5.395 (0.951) indicating that the market
values a firm’s share more than 5 times its
+ β8 CEO-CHAIR-DUAL DUM i book value on average, i.e., pays a premium
+ β9 BD-SAL-Ratio i + β10 DEBT-Ratioi over book value. The distribution of MBVE
ratio in the sample appears to be highly
+ β11LOG-ASSETS i + β12 INVEST-Ratioi
skewed as evident from the marked difference
+ β13 LIQUIDITY-Ratioi between the mean and the median. It appears
+ β14 PROFIT-VOLATILEi + ε i that a few firms command a very high MBVE
ratio while others have a generally low ratio.
With regard to the models and variables used The Log transformation neutralises the skew-
in this study, Table 1 explains variable labels, ness to a large extent. The mean (median)
definitions and expected signs. The main board shareholding is 0.388 (0.473), which

© 2007 The Authors Volume 15 Number 6 November 2007

Journal compilation © Blackwell Publishing Ltd. 2007
1460 CORPORATE GOVERNANCE

Table 1: Performance and ownership equation

Performance equation (MBVE as predicted variable)

Variable label Variable Variable definition Predicted sign

Endogenous variable
BD-SHARE Board ownership Board shareholding as a % of total outstanding shares +/-
(BD-SHARE)2 Board ownership squared +/-
(BD-SHARE)3 Board ownership cubed +/-
Explanatory variables
BD-SAL1 Board salary (Spline – 1) Tk 00–0.15 million +/-
BD-SAL2 Board salary (Spline – 2) Tk 0.15 million–0.75 million +/-
BD-SAL3 Board salary (Spline – 3) Above Tk 0.75 million +/-
INST-SHARE Financial institutional ownership Institutional shareholding as a % of total outstanding +/-
shares
(INST-SHARE)2 Institutions ownership squared +/-
NON-EXE-DIR-Ratio Non-executive directors’ ratio Ratio of non-executive directors ⫼ all directors +
CEO-DUM CEO dummy Owner or founder acts as CEO = 1 –
CEO-CHAIR-DUM CEO-Chair duality dummy CEO acts as Chairman = 1 –
CEO-TENURE CEO tenure No. of years served as CEO –
DPS Dividend per share Total dividend declared ⫼ total outstanding shares +
BIG-4 AUDIT-DUM BIG-4 affiliated dummy BIG-4 affiliated audit firm = 1 +
DEBT-Ratio Debt ratio Debt ⫼ total assets +/-
LOG-SALES Firm size Log total sales -
INVEST-Ratio Investment ratio Capital expenditure ⫼ total assets +
ADVER-Ratio Advertising ratio Advertising expenditure ⫼ total assets +
EARN-VOLATILE Firm-level risk SD of operating earnings ⫼ total sales -
and
IND-DUM Industry dummy 11-industry dummies ?
Or
YEAR-DUM Year dummy 8-year dummies ?
Or
TYPE-DUM Firm type dummy 5-firm-type dummies ?

Ownership Equation (BD-SHARE as predicted variable)

Variable label Variable Variable definition Predicted sign

Endogenous variable
MBVE-Ratio Market-to-book value of equity Market value of equity ⫼ book value of equity +/-
Explanatory variables
INST-SHARE Financial institutional ownership Institutional shareholding as a % of total outstanding –
shares
PUB-SHARE Public ownership Minority shareholding as a % of total outstanding shares –
GOV-SHARE Government ownership Government shareholding as a % of total outstanding -
shares
BD-SIZE Board size Number of directors on the board +/-
BD-SAL-Ratio Board salary ratio Directors’ salary ⫼ operating expense -
CEO-CHAIR-DUM CEO-Chair duality dummy CEO acts as Chairman = 1 +
CEO-TENURE CEO tenure No. of years served as CEO +
FIRM-AGE Firm age No. of years incorporated as a public limited company +/-
DEBT-Ratio Debt ratio Debt ⫼ total assets +/-
LOG-ASSETS Firm size Log total assets +/-
INVEST-Ratio Investment ratio Capital expenditure ⫼ total assets +
PROFIT-VOLATILE Firm-level risk SD of return on equity (ROE) +
LIQUIDITY-Ratio Liquidity ratio Cash flow ⫼ total assets +

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CORPORATE GOVERNANCE IN BANGLADESH 1461

Table 2: Summary of statistics on governance and financial characteristics

Variable Mean Median S.D. Minimum Maximum

MBVE 5.395 0.951 92.677 0.03 2,466.94

BD-SHARE 0.388 0.473 0.192 0.00 0.982
BD-SAL (Tk mill.) 0.947 0.440 1.554 0.00 13.53
BD-SAL-Ratio 0.042 0.021 0.059 0.00 0.33
BD-SIZE 8.3 6.00 6.249 3 37
NON-EXE-DIR-Ratio 0.672 0.80 0.294 0.00 0.97
INST-SHARE 0.197 0.176 0.133 0.001 0.96
PUB-SHARE 0.310 0.307 0.152 0.009 0.788
GOV-SHARE 0.029 0.00 0.112 0.00 0.66
CEO-DUM (no. of cases) 561
CEO-TENURE 10.4 9.00 7.257 1 32
CEO-CHAIR-DUM (no. of cases) 284
DPS (Tk) 8.9 4.9 11.49 0.00 100.34
FIRM-AGE 15.0 14 8.22 1 43
BIG-4 AUDIT-DUM (no. of cases) 240
DEBT (Tk mill.) 868.2 242.8 3,050.51 1.2 39,955.06
DEBT-Ratio 0.569 0.585 0.217 0.01 1.0
INVEST (Tk mill.) 38.0 6.81 143.64 0.00 2724.97
INVEST-Ratio 0.052 0.017 0.093 0.00 0.870
ADVER (Tk mill.) 3.3 0.39 14.32 0.00 199.58
ADVER-Ratio 0.005 0.001 0.020 0.00 0.28
CASH FLOW (Tk mill.) 49.8 24.13 87.93 -95.71 701.81
LIQUIDITY-Ratio 0.065 0.058 0.069 -0.41 0.65
Firm size – SALES (Tk mill.) 614.1 246.16 1,847.75 1.17 24,927.68
Firm size – ASSETS (Tk mill.) 1,172.6 399.7 3,211.62 9.00 41,895.87
Firm-level risk (EARN- VOLATILE) 0.472 0.096 2.356 0.00 43.63
Firm-level risk (PROFIT VOLATILE) 0.242 0.037 1.932 0.00 48.10

appears to be fairly high. Average institutional,
government and minority shareholdings are
0.197, 0.029 and 0.310 respectively. Average
board size is 8 of which two-thirds are non-
executive directors and average board salary is
close to Tk 1 million. In Bangladesh, compa-
nies have to disclose board compensation, but
a narrow definition of compensation is used,
which includes only salary, bonuses, and fees
paid to the board members including the CEO
to attend board meetings. Any kind of perks or
profit sharing is not usually reported in annual
reports. Stock options or additional stock
awards are non-existent in Bangladesh. About
78 per cent of firms in the sample have owner
CEOs and the remainder have non-owner
CEOs. The CEOs of 39 per cent of firms also act
as chairperson of the board. While the average
firm age is 15 years, average CEO tenure is
about 10 years. In contrast to owner CEOs,
non-owner CEOs are professionals who virtu-
ally own no shares in the firm and do not act
as chairperson of the board. Their tenure is
expected to be less than that of owner CEOs.
On the contrary, owner CEOs can influence the
firm so that they serve as CEOs for a long
period of time by virtue of their large share-
holdings in the firm. Only 33 per cent of firms
have Big-4 affiliated audit firms. Firms show a
high level of earning and profit volatility. The
average dividend per share is less than 10 per
cent, debt ratio is 57 per cent, investment ratio
is 5 per cent and the liquidity ratio is 7 per cent.
Empirical Results
Table 3 presents both linear and cubic-form
regression (all firm effects) results for the first
line of research. The Linear-form regression
shows a significant negative effect of board
ownership on log MBVE, implying that higher
levels of board shareholding lead to declining
firm performance and vice-versa. When board
shareholding cubic-form variables are used, a
significant non-linear relationship between the
two is discovered1. That is, performance
initially decreases, then increases and again

© 2007 The Authors Volume 15 Number 6 November 2007

Journal compilation © Blackwell Publishing Ltd. 2007
1462 CORPORATE GOVERNANCE

Table 3: Determinants of financial performance

Variables Log MBVE Log MBVE

(Linear-form OLS) (Cubic-form OLS)

CONSTANT -0.184 -0.160

(-1.646)* (-1.485)
BD-SHARE -0.274 -3.221
(-3.141)*** (-7.250)***
(BD-SHARE)2 9.677
(7.639)***
(BD-SHARE)3 -7.739
(-8.132)***
INST-SHARE -0.848 -0.776
(-3.404)*** (-3.166)***
(INST-SHARE)2 0.668 0.594
(1.835)* (1.677)*
NON-EXE-DIR-Ratio 0.008 -0.035
(0.156) (-0.706)
BD-SAL1 1.761 1.840
(up to Tk 0.15 m) (5.101)*** (5.570)***
BD-SAL2 -0.356 -0.289
(Tk 0.15 m–0.75 m) (-4.193)*** (-3.526)***
BD-SAL3 0.036 0.027
(over Tk 0.75 m) (2.902)*** (2.229)**
CEO-DUM 0.177 0.233
(3.996)*** (5.246)***
CEO-CHAIR-DUM 0.067 0.021
(2.098)** (0.676)
CEO-TENURE -0.010 -0.009
(-4.800)*** (-4.195)***
DPS 0.006 0.005
(4.692)*** (4.582)***
DEBT-Ratio 0.540 0.539
(7.714)*** (8.051)***
BIG-4 AUDIT-DUM 0.111 0.145
(3.466)*** (4.630)***
LOG-SALES -0.076 -0.078
(-2.561)*** (-2.755)***
INVEST-Ratio 0.378 0.402
(2.569)*** (2.856)***
ADVER-Ratio 2.567 1.995
(3.531)*** (2.823)***
EARN-VOLATILE -0.006 -0.005
(-1.012) (-0.899)
N 723 723
Adjusted R2 0.195 0.263
F-statistic 11.266*** 14.590***
Turning points: Minimum 22.97%
Maximum 60.39%

***Significance at 1% confidence level using two-tailed test.

**Significance at 5% confidence level using two-tailed test.
*Significance at 10% confidence level using two-tailed test.

Volume 15 Number 6 November 2007 © 2007 The Authors

Journal compilation © Blackwell Publishing Ltd. 2007
CORPORATE GOVERNANCE IN BANGLADESH
decreases as board shareholding increases. The
turning points show that lower levels of board
shareholding (up to 22.97 per cent) are nega-
tively related to performance, but the impact
turns positive for moderate levels of owner-
ship (between 22.97 per cent–60.39 per cent)
and finally becomes negative as board owner-
ship rises further (beyond 60.39 per cent). The
cubic regression model shows a significant
relationship at the 1 per cent confidence level,
having adjusted R2 of 0.263 and is stronger than
for the linear form. Therefore, it appears 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.
For other governance variables, the 3 piece-
wise (or splines) variables for board salary
show a non-linear relation with performance.
It has a positive effect when the salary range is
up to Tk 0.15 million (US$2,500), then a nega-
tive effect between Tk 0.15 million and 0.75
million (US$2,500–$12,500) and again a posi-
tive effect for board salary over Tk 0.75 million
(US$12,500). Institutional shareholding ini-
tially has a strong negative impact on perfor-
mance at 1 per cent significance level, but a
positive effect thereafter at 10 per cent level.
This result suggests that institutions start
monitoring the firm once they reach substan-
tial stakes in it. The CEO dummy is significant
and positive, against expectations. It was
expected to have a negative impact on perfor-
mance considering the controlling dominance
of family or founder over the firm’s overall
activity. However the evidence is contrary to
this, indicating that CEOs might have an
owner-specific attribute (e.g., entrepreneurial
ability, talents, etc.) that contributes toward
firm value. As for CEO tenure, the relationship
with performance is significantly negative, as
expected. This means a longer CEO tenure is
value destroying due to an entrenchment
effect or excessive reliance on CEO human
capital. Both non-executive directors and
CEO-Chair dummy have no effect on perfor-
mance. Dividend per share shows a signifi-
cantly positive relationship with performance
as it serves as a signal of a high quality firm.
This is because in Bangladesh dividend perfor-
mance is considered to be a strong indicator of
financial performance and sound operational
management of the firm. Shareholders appear
to prefer cash dividends and be willing to pay
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
1463
a higher price for firms that pay regular divi-
dends. Regulators, particularly the SEC, also
emphasize regular payment of dividends. Tax
incentives are allowed for firms paying regular
dividends. In addition, the Dhaka Stock
Exchange has categorized its securities (e.g., A,
B and Z categories) on the basis of dividend
payments and holding AGMs regularly, which
appear to impact on the market price of shares.
The debt ratio has a significant positive rela-
tionship with performance, consistent with
agency theory. The Big-4 audit firm dummy
presents a positive performance effect. This
implies that the accounting and audit quality
of the firm is one of the vital control-
mechanisms to protect the interest of outside
shareholders. For control variables, firm size
and two discretionary expenditures show,
respectively, a significantly negative and posi-
tive relationship with performance, while firm
risk appears to have no effect.
The above mentioned non-linear relation-
ship between board ownership and perfor-
mance supports the conclusions of Morck et al.
(1988) that the relationship between manage-
rial or board ownership and firm performance
may not be a simple linear one; rather it
appears to be non-linear, dependent on the
level of board ownership and the institutional
set-up in a particular country. It is also appar-
ent that the nature of non-linearity may be dif-
ferent in different countries or even across
firms within the same country, depending
upon the sample size, sample period, perfor-
mance measure used, analytical tool used, etc.
The non-linear relationship between board
ownership and firm performance in the
present study is not exactly the same as found
in most empirical research on developed
economies. The non-linear relation of the
present study matches with those found by
Belkaoui and Pavlik (1992) in the US and
Prevost et al. (2002) in New Zealand with the
exception of the range of board ownership and
the use of OLS regression – piecewise vs.
cubic. However, the cubic-form non-linearity
of board ownership found in this study stands
in contrast to that found in Chen et al. (1993)
and Short and Keasey (1999), where the direc-
tion of non-linearity and the turning points are
the opposite from these found in this study.
A number of tests were undertaken to deter-
mine the robustness of the above empirical
results. These tests (although not reported here)
confirm the non-linear relationship2. Spline
board ownership variables are adopted from
the ‘turning points’ observed in the cubic-form
regressions. The cubic-form ownership vari-
ables are replaced by the three spline owner-
ship variables (00–0.2286, 0.23–0.60, above
0.60) keeping all other explanatory variables
Volume 15 Number 6 November 2007
1464
unchanged. The piecewise regression confirms
the results of the cubic-form regression of
Table 3 with only minor differences. Regres-
sion analysis for the manufacturing firms only
(603 firm-years) also confirms the non-linear
relationship of Table 3, with the exception of
financial institutional shareholding squared
and CEO dummy variable. Furthermore, sepa-
rate annual cross-sectional regressions show
significant non-linearity of board ownership
and MBVE ratio in the years 1996, 1998, 1999
and 2001. In accordance with the empirical lit-
erature, a number of ‘fixed-effects’ such as
industry effect, firm effect and specific firm-
type effect if omitted could produce a spurious
correlation between ownership and perfor-
mance. Tests of all of these fixed-effects confirm
the non-linearity of board ownership3.
Table 4 provides 2-SLS estimates for the
simultaneous equations model. In the perfor-
mance equation, the main variable of interest –
board ownership – has no explanatory power
to determine MBVE. This finding is contrary to
that of the OLS regression results discussed
above. That is, consistent with the established
literature, the significant negative relationship
between board ownership and MBVE in the
single equation model disappears when own-
ership is assumed to be endogenous. On the
other hand, the board shareholding equation
reveals a significantly negative relation be-
tween MBVE and board ownership. This
supports the view that there is a ‘reverse-
causality’ relationship4, i.e., a firm’s financial
performance determines the level of board
ownership but not vice-versa. As the relation-
ship flows from performance to board owner-
ship and is negative, it follows that a decrease
in board ownership results from high financial
performance and vice-versa. Board members
seem to hold fewer shares when a firm is
doing well. This is due to selling shares on the
part of the board members during good times,
with the expectation that good performance
will be followed by poor performance; or due
to liquidating a part of the stockholdings to
generate capital gain so that their human
capital is less firm-specific; or due to the pres-
ence of a creditor’s monitoring. Such behav-
iour is consistent with the agency literature.
The ‘reverse-causality’ found in this study
with negative sign is consistent with the find-
ings of both Loderer and Martin (1997) and
Demsetz and Villalonga (2001). This is cor-
roborative of a relationship between board
shareholding and performance existing, but
that performance appears to drive board
shareholding. With regard to the other
explanatory variables in the MBVE equation,
the 2-SLS estimates are mostly similar to those
found in the OLS regression except for CEO-
Volume 15 Number 6 November 2007
CORPORATE GOVERNANCE
Chair dummy which turns positive at 10 per
cent significance level.
Conclusion
This study analyses the link between board
ownership and financial performance for listed
firms in Bangladesh, based on ownership
being viewed as exogenous and endogenous.
It seeks to identify similarities or differences in
relationships found in Bangladesh with those
found in developed economies. While the evi-
dence on the ownership-performance relation-
ship is mixed, it clarifies the role of corporate
governance in improving corporate perfor-
mance. The empirical findings of the study in
both streams of research are similar to those
found in developed economies.
Regarding the first stream of research, the
linear OLS estimates show a negative relation-
ship between board ownership and perfor-
mance, indicating that high board ownership
destroys firm value and vice-versa. The cubic-
form OLS estimates support the existence of a
non-linear relationship between board share-
holding and financial performance. This indi-
cates that board ownership destroys value up
to 23 per cent level of ownership, enhances
value between 24 per cent and 60 per cent
levels of ownership and again destroys value
beyond the 60 per cent level. 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, with only few
departures from the literature. Institutional
shareholdings have a significantly negative
effect on performance at lower levels of own-
ership due to lack of incentives, but later
become positive. This implies inadequate insti-
tutional activism or a passive role until they
gain sizable stockholding. Board salary
appears to be a value provider up to the level
of US$2,500, then a value destroyer for the
salary levels between US$2,500 and $12,500
and finally, a value enhancer above US$12,500.
The sign of the board salary variables on per-
formance is opposite to that of the board own-
ership variables suggesting that the negative
performance effect of one variable might be
compensated by the positive performance
effect of the other. It seems that although non-
executive directors are irrelevant in improving
performance, owner-CEO and CEO-chairman
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007
CORPORATE GOVERNANCE IN BANGLADESH 1465

Table 4: Determinants of MBVE and board shareholding

Variables Log MBVE (2-SLS) Board Shareholding (2-SLS)

CONSTANT -0.217 0.663

(-1.791)* (15.247)***
BD-SHARE -0.194
(-1.362)
LOG-MBVE-Ratio -0.254
(-4.911)***
INST-SHARE -0.799 -0.351
(-3.087)*** (-7.304)***
(INST-SHARE)2 0.615
(1.652)*
PUB-SHARE -0.312
(-7.586)***
GOV-SHARE -0.457
(-7.685)***
BD-SIZE 0.003
(2.925)***
NON-EXE-DIR-Ratio 0.004
(0.084)
BD-SAL1 1.765
(up to Tk 0.15 m) (5.109)***
BD-SAL2 -0.347
(Tk 0.15 m–0.75 m) (-4.039)***
BD-SAL3 0.038
(over Tk 0.75 m) (2.978)***
BD-SAL-Ratio -0.261
(-2.316)**
CEO-DUM 0.170
(3.747)***
CEO-CHAIR-DUM 0.062 0.068
(1.897)* (5.186)***
CEO-TENURE -0.011 0.005
(-4.849)*** (3.779)***
FIRM-AGE -0.006
(-6.841)***
DPS 0.006
(4.580)***
BIG-4 AUDIT-DUM 0.116
(3.533)***
DEBT-Ratio 0.532 0.168
(7.488)*** (4.127)***
LOG-SALES -0.073
(-2.462)***
LOG-ASSETS -0.073
(-5.430)***
INVEST-Ratio 0.378 -0.035
(2.571)*** (-0.549)
ADVER-Ratio 2.653
(3.598)***
EARN-VOLATILE -0.006
(-0.960)
PROFIT-VOLATILE 0.020
(4.670)***
LIQUIDITY-Ratio 0.004
(0.033)
N 723 723
Adjusted R2 0.187 0.447
F-statistic 10.782*** 42.718***

***Significance at 1% confidence level using two-tailed test.

**Significance at 5% confidence level using two-tailed test.
*Significance at 10% confidence level using two-tailed test.

© 2007 The Authors Volume 15 Number 6 November 2007

Journal compilation © Blackwell Publishing Ltd. 2007
1466
do improve performance. However, this
erodes as CEO tenure gets longer. With respect
to other governance variables, dividend, debt
and Big-4 affiliated audit appear to have posi-
tive performance effects. As for the control
variables, firm size and discretionary expendi-
tures have a negative and positive effect,
respectively, on performance as expected,
while earning volatility has no influence at all.
In the second stream of research, the 2-SLS
results present a completely opposite conclu-
sion for board ownership in the performance
equation – it shows no significant effect for
board ownership on performance. This im-
plies that board ownership is irrelevant in
explaining firm financial performance in
Bangladesh. The board ownership equation
shows a significantly negative effect of perfor-
mance on board ownership. That is, there is
a reverse-causality: performance determines
board ownership rather than board ownership
determining performance.
With respect to other governance and
control variables, the 2-SLS results for all these
variables in the performance equation are
similar to the OLS results with the exception of
the CEO-Chair dummy variable. In the board
ownership equation, the 2-SLS results indicate
a negative effect for substitute ownership
types, such as institutional, government, and
public shareholdings on board ownership, as
expected. Firm age, board salary ratio and firm
size also have a negative impact on board own-
ership while investment and liquidity ratios
have no significant impact. Factors such as
board size, CEO-chairman, CEO tenure, debt
and profit volatility appear to have positive
influence on board ownership, as expected.
These results imply that board ownership is
determined by a number of alternative gover-
nance and control variables, in addition to
financial performance.
Notes
1. Non-linearity is also found using Log
Tobin’s Q and ROA as performance
measures (Farooque et al., 2006).
2 & 3. For brevity these results are not reported
here but are available from the authors upon
request.
4. Reverse-causality is also found in Farooque
et al. (2007) using Log Tobin’s Q and ROA as
the performance measures.
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Omar Al Farooque is a Lecturer in Accounting
at the University of New England. He has pub-
lished in different journals including the Asia
Pacific Journal of Accounting and Economics
(APJAE). Waiting for his PhD award, Mr.
Farooque’s research interests are in corporate
governance, finance, financial disclosure and
reporting and entrepreneurship.
Volume 15 Number 6 November 2007
1468
Tony van Zijl is Professor of Accounting &
Financial Management and Director of the
Centre for Accounting, Governance and Taxa-
tion Research at Victoria University of Well-
ington. His research interests are in valuation,
cost of capital and financial reporting. He is a
Director of the international expert services
firm LECG (NASDAQ: XPRT).
Keitha Dunstan is a Professor of Accounting
and Head of the School of Accounting and
Commercial Law at Victoria University of
Wellington. She is also a member of New
Zealand Securities and Exchange Commis-
Volume 15 Number 6 November 2007
CORPORATE GOVERNANCE
sion. Professor Dunstan’s research interests
are in the areas of corporate governance and
financial accounting.
AKM Waresul Karim is a Senior Lecturer in
Accounting at Victoria University of Welling-
ton. Starting his career at the University of
Dhaka, Dr Karim earned a PhD from the
University of Leeds. He has published ex-
tensively in academic and professional jour-
nals including the International Journal of
Accounting, Asia Pacific Journal of Accounting
and Economics and Research in Banking and
Finance.
© 2007 The Authors
Journal compilation © Blackwell Publishing Ltd. 2007