The Effect of Ownership Concentration on Firm Value and Corporate Governance in Bangladesh Listed Firms

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 governance control mechanisms, in particular Top 1 shareholder's ownership and firm performance relation in Bangladesh. Appropriate methodology (e.g., quadratic-form linear regression and two-stage least square regression model) is used on an unbalanced pooled sample of 'listed firms' with a view to modelling corporate governance mechanisms for Bangladesh corporate firms. In the context of dearth of research focusing on Bangladesh in this field, this study offers new insights into corporate governance practices in Bangladesh. Consistent with prior research, it examines ownership-performance interactions based on exogeneity and endogeneity assumption of ownership and performance variables. OLS regression documents a strong positive linear and weak non-linear relation between Top 1 shareholder's ownership and performance (market-to-book value of equity). On the other hand, 2- SLS regressions also support positive relationship between Top 1 shareholder's ownership and performance and their simultaneity. That is, a bidirectional or 'two-way' causal relationship between them is established under 2-SLS framework when endogeneity of ownership is controlled for. Following recent literature, this study endorses such bidirectional relationship between ownership and performance. A few 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.