Corporate governance in Bangladesh: Evidence on the link between board ownership and financial performance

Abstract

The question whether corporate governance mechanisms matter for firm's financial performance is getting momentum increasingly in the business and academic arena across the world due to the ongoing globalization process. This Paper analyses empirically corporate governance mechanisms, in particular board ownership and firms' financial performance relation in Bangladesh, an emerging market economy. Employing the most appropriate methodology (e.g., cubic-form linear regression and two-stage least square regression model) on an unbalanced pooled sample of 'listed firms', it aims at modelling corporate governance for Bangladesh corporate firms. In the context of dearth of research in this field focusing on Bangladesh, this study redresses this gap and offers new insights into corporate governance practices in Bangladesh. Following the literature, it investigates ownership-performance interactions based on both the assumption of exogeneity (OLS) and endogeneity (2-SLS) of ownership, but prefers to stick to the endogeneity assumption. While OLS regression method documents a non-linear relation between board ownership and performance (market to book value of equity), it disappears when 2-SLS regression method is applied. That is, uni/mono-directional causal relationship from ownership to performance under OLS ceases to exist under 2-SLS when endogeneity of ownership is controlled and a reverse-causality emerges. Other governance and control variables also have effect consistent with the literature. These results suggest directly strengthening of 'internal control mechanisms' and indirectly 'external sources of discipline' for corporate listed firms in Bangladesh to ensure accountability and transparency and to cope with the ongoing globalization and business development.