Corporate Governance: An Emerging Market Context - Lessons for Regulators, Policy Makers and Stakeholders

Abstract

This book addresses the relationship between ownership structure, an essential component of corporate governance, and financial performance. This in is a pivotal issue in corporate finance. Some corporate governance research supports the existence of a linear 'mono-directional' relationship where causality of the relationship runs from ownership to financial performance (Berle and Means 1932: Jensen and Meckling 1976). Other research recognises a non-linear mono-directional relationship between ownership and performance (Morck et al 1988; McConnell and Servaes 1990 and 1995; Chen et al 1993; Short and Keasey 1999, Davies et al. 2005). The mono-directional relationship is based on the assumption that ownership is 'exogenous'. However, more recent studies argue that ownership is 'endogenous'. Using a simultaneous equations comprising a Performance equation and a n ownership structure equation to model endogeneity, these studies resent evidence of either a 'reverse-way' or a 'bi-directional' relationship between ownership and performance (Chung and Pruitt 1996: Loderer and Martin 1997; Cho 1998; Bohren and Odegaard 2001 and 2006; Demsetz and Villalonga 2001; Davies et al. 2005). The governance research referred to above has been conducted mainly in the context of developed countries, most notably in the United States. Only a few of the published studies have been based on emerging market economies, while none have focused on Bangladesh. There are substantial institutional differences, including the mechanisms of corporate governance between countries such as Bangladesh and countries with developed economies. Emerging markets differ substantially from developed economies in their institutional, regulatory and legal environments (Prowse 1999). However, it is not known whether existing differences in institutional, regulatory and corporate governance practices also translate into differences in the relationship between ownership and firm performance. This study contributes to answering this question by studying the nature of the relationship between ownership and financial performance for Bangladesh listed firms.