Description
The purpose of this paper is to test whether dominant shareholder(s) of a firm enhance
performance in Bangladesh and thus examines the arbitrary moves by the regulatory bodies, in the
name of promoting “good corporate governance”, to restrict ownership concentration.
Accounting Research Journal
Co-deterministic relationship between ownership concentration and corporate
performance: Evidence from an emerging economy
Omar Al Farooque Tony van Zijl Keitha Dunstan Akm Waresul Karim
Article information:
To cite this document:
Omar Al Farooque Tony van Zijl Keitha Dunstan Akm Waresul Karim, (2010),"Co-deterministic relationship
between ownership concentration and corporate performance", Accounting Research J ournal, Vol. 23 Iss 2
pp. 172 - 189
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Co-deterministic relationship
between ownership concentration
and corporate performance
Evidence from an emerging economy
Omar Al Farooque
School of Business, Economics and Public Policy,
University of New England, Armidale, Australia
Tony van Zijl
School of Accounting and Commercial Law,
Victoria University of Wellington, Wellington, New Zealand
Keitha Dunstan
School of Business, Bond University, Gold Coast, Australia, and
Akm Waresul Karim
School of Economics and Business Administration,
Saint Mary’s College of California, Moraga, California, USA
Abstract
Purpose – The purpose of this paper is to test whether dominant shareholder(s) of a ?rm enhance
performance in Bangladesh and thus examines the arbitrary moves by the regulatory bodies, in the
name of promoting “good corporate governance”, to restrict ownership concentration.
Design/methodology/approach – Building on the established literature, a simultaneous equations
approach is applied to model the relationship between ownership concentration and performance and
is tested on a sample of 567 observations on ?rms listed on the Dhaka Stock Exchange over a
seven-year period. The two equations model consists of ?rm performance and ownership
concentration as endogenous variables along with other governance variable.
Findings – The results suggest a signi?cant positive co-deterministic relationship between
ownership concentration and ?rm performance indicating that ownership concentration and ?rm
performance simultaneously impact each other. It suggests that the ownership restriction imposed by
the Securities and Exchange Commission is unjusti?ed and detrimental to ?rm performance/growth in
emerging countries such as Bangladesh.
Practical implications – This new evidence from an emerging market enhances our understanding
of corporate governance in Asian countries. The study has implications for stakeholders, regulators
and policy makers to revisit their attempt to limit founder-family ownership holdings. Instead, their
aimshould be to balance the home-grown unique features, such as a Top-1 dominant shareholder, with
Western governance mechanisms.
Originality/value – The paper is the ?rst to consider Top 1 shareholder’s ownership as the measure
of ownership concentration, which is an important feature of the corporate sector in emerging markets.
In emerging markets, founder-family ownership concentration acts as an alternative governance
mechanism substituting for strong and effective legal backing and other market-driven monitoring
mechanisms.
Keywords Bangladesh, Company performance, Corporate ownership, Emerging markets
Paper type Research paper
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1030-9616.htm
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Accounting Research Journal
Vol. 23 No. 2, 2010
pp. 172-189
qEmerald Group Publishing Limited
1030-9616
DOI 10.1108/10309611011073250
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1. Introduction
The interaction between ownership structure and ?rmperformance has been the subject
of ongoing debate in the many studies that have appeared in the literature on ?rm
performance, dating from the seminal work of Berle and Means (1932). Early studies in
this literature suggested a unidirectional monotonic relationship between ownership
and ?rm performance but later studies have suggested that the relationship might be
non-monotonic (Morck et al., 1988; McConnell and Servaes, 1990, 1995; Belkaoui and
Pavlik, 1992; Chen et al., 1993; Short and Keasey, 1999; Faccio and Lasfer, 1999;
Holderness et al., 1999; Sarkar and Sarkar, 2000; Davies et al., 2005, Farooque et al.,
2007a). The notion of a unidirectional – monotonic or non-monotonic – relationship
between ownership and ?rmperformance was based on the assumption that ownership
is exogenous. This was strongly challenged by Demsetz (1983) and Demsetz and Lehn
(1985). Accordingly, recent empirical studies have been based on the view that
ownership is endogenous and provide evidence of two new dimensions of the
relationship between ownership and ?rmperformance – reverse-way causality (Loderer
and Martin, 1997; Cho, 1998; Demsetz and Villalonga, 2001; Bohren and Odegaard, 2001,
2006; Farooque et al., 2007b) and two-way causality (“co-deterministic” relationship)
(Chung and Pruitt, 1996; Davies et al., 2005; Kapopoulos and Lazaretou, 2007).
To date, emerging economies have been grossly underrepresented in the corporate
governance research literature. This study is therefore intended to contribute to
bridging that gap and although it deals with Bangladesh, its ?ndings may generalise to
other emerging economies, particularly those in Asia. Given that emerging economies
tend to have signi?cantly different governance and institutional arrangements, study of
the ownership – ?rmperformance relationship in that context could potentially provide
new evidence on the relationship that might be of interest not only to emerging
economies but also to developed economies. For emerging economies, study of the
relationship may provide insights on whether there is a need to develop governance
arrangements that are speci?c to a particular country or a number of countries or
whether models that are tested elsewhere, albeit in different socio-economic settings,
could be transported to emerging economies and expected to be as effective. This issue is
of particularly importance at the present time in Bangladesh as the Securities and
Exchange Commission (SEC) has recently ruled to limit the founder-family ownership
threshold to just 10 per cent and the number of family directors to just one. This
directive, issued by the SECin January 2006, and apparently supported by Bangladesh’s
development partners such as the World Bank, International Monetary Fund (IMF) and
Asian Development Bank (ADB), exempli?es how an arbitrary ruling can lead to
governance structures that may be value destructive rather than value enhancing. In
another arbitrary move, the Banking Companies Act of 1991 was amended in 2007 to
inter alia limit the number of directors in commercial banks to thirteen (Bangladesh
Bank, 2007). Although this was claimed to have been done with the aim of promoting
“good corporate governance” in the banking sector, the link between the number of
directors and the quality of governance is open to question. More recently, the
Bangladesh Bank (central bank) has ruled that each bank must appoint two directors
from among the depositors of the bank. Not surprisingly, this move was strongly
resisted by bank directors and with the result that the regulator has had to compromise
by calling for the appointment of independent directors rather than depositor directors.
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This paper tests whether dominant shareholders (and the founders or family owners)
of a ?rm enhance performance. To examine this relationship, we measure ownership in
terms of the concentration in the hands of the largest shareholder (henceforth, “Top-1
shareholder”) and thus empirically examine the basis for the Bangladesh SEC’s
directive prohibiting shareholding concentration in excess of 10 per cent for any family,
including that of the founder. In most cases the Top-1 shareholder is the founder, or the
chief executive of?cer (CEO) or Chairman or both and has a strong presence in the
boardroom. Thus, a study testing whether there is a link between Top-1 shareholding
levels and ?rmperformance would contribute to the literature by providing evidence on
such a link (if any) in addition to the effect of the whole board’s ownership on corporate
performance, while controlling for the other governance mechanisms in place
(Farooque et al., 2007a, b). This evidence can also be compared with the related evidence
from studies on developed economies. In a similar fashion, our earlier work
Farooque et al.(2007a, b) both provide evidence of a reverse causality relationship in the
simultaneous equation models (two stage least squares (2SLS) models) whereby
performance measures (e.g. log Tobins Q, return on assets (ROA) in Farooque et al.
(2007b) and log market to book value of equity (MBVE) in Farooque et al. (2007a))
appear to determine the degree of managerial (board) ownership in Bangladesh listed
?rms, consistent with the evidence from studies on developed economies. Apart from
explanations on endogeneity concern, Farooque et al. (2007a) also con?rm one-way
causality of non-linear/non-monotonic relationship between managerial (board)
ownership and performance measure (e.g. log MBVE) in the single equation model
(ordinary least square (OLS) model), as evident in developed country based studies.
The rest of this paper is organized as follows. Section 2 considers the theoretical
underpinnings of the ownership concentration and performance relationship and
reviews studies that apply a simultaneous equations approach to test the relationship.
Section 3 brie?y sketches the governance and institutional setting in Bangladesh.
Section 4 develops the hypothesis and outlines the research method, while Section 5
presents the empirical ?ndings. Finally, Section 6 draws the conclusions to the paper.
2. Theoretical foundation and review of the literature
2.1 Theoretical foundation
Corporate governance research addresses the agency con?ict arising in ?rms from the
separation of ownership from control. Underlying the potential for agency con?ict is
the view of the ?rm as a nexus of contracts among self-interested parties who
contribute capital, expertise, labour and other services to the ?rm (Alchian and
Demsetz, 1972; Jensen and Meckling, 1976; Fama and Jensen, 1983a). Dispersed
shareholders (outsiders) suffer from collective action and free-rider problems and have
little incentive to monitor managers (insiders). Thus, the potential for con?icts of
interest between dispersed shareholders and managers is likely to impose signi?cant
agency costs on shareholders ( Jensen and Meckling, 1976; Williamson, 1979; Fama and
Jensen, 1983b; Hart and Moore, 1990).
La Porta et al. (1999) survey corporate ownership around the world and ?nd that
many listed ?rms in countries other than the USA and the UK have a controlling
shareholder owning more than 20 per cent or even 30 per cent of ?rm’s outstanding
shares. A large shareholding may act as an effective means of reducing agency costs,
in particular, in the absence of adequate legal protection for minority shareholders
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(Shleifer and Vishny, 1986, 1997; Grossman and Hart, 1980). Large shareholders can
resolve moral hazard and free-rider problems, having outright control over ?rms and
their managements. Theycaninternalize both the costs andbene?ts of monitoring. They
have economic incentives and enough voting power to monitor effectively and place
pressure on management or even oust management through a proxy ?ght or a takeover.
Given market imperfections and/or incomplete contracts, ownership concentration
is one of the key governance devices suggested in the literature to minimize these
agency costs. Founder-family leadership is a particular form of concentrated
ownership that can substitute for other corporate governance mechanisms. Denis and
Denis (1994) view founder-family majority ownership as an organizational form
delivering internal monitoring to reduce managerial inef?ciencies. These ?rms remain
viable with no systematic poor performance, as founder-family involvement is value
maximizing due to reputation considerations and the probable risk of sanctions from
non-manager family members. Fama and Jensen (1983a) argue that the long-term
nature of family relationships is advantageous in monitoring and disciplining
managers. This suggests that closely-held ?rm leadership can be an ef?cient corporate
control mechanism to reduce agency cost (Fama and Jensen, 1983a).
A major shareholder adopting a passive stance may appear to have no impact on
management but in fact is likely to pose a threat to management and, therefore, by
virtue of that threat provide a constraint on management discretion. However, a major
shareholder adopting an active role in decision making may have two mutually
exclusive effects: the active role may manifest as monitoring of management in order to
reduce agency costs but it could also manifest as actions aimed at bene?ting the large
shareholder at the expense of minority shareholders, especially when there is
divergence between voting rights and cash-?ow rights (La Porta et al., 1999). Barclay
and Holderness (1989) contend that large shareholders receive substantial private
bene?ts from control; therefore, the interests of large and small shareholders may not
perfectly align. This potential con?ict is widely recognized in the law literature:
[. . .] holders of a majority of the voting shares in a corporation through their ability to elect
and control a majority of the directors and to determine the outcome of shareholders votes,
have tremendous power to bene?t themselves at the expense of minority shareholders
(O’Neal, 1987, p. 125).
The higher the concentration level, the easier it is for the large shareholders to take
self-serving actions to transfer minority shareholders’ wealth into their own hands.
The degree of expropriation by insiders depends on the investment opportunities
available and the cost of such expropriation to the ?rm (La Porta et al., 2000). Durnev
and Kim (2003) suggest that insiders expropriate more when controls in the market are
slack and take less when the market is depressed.
Thus, while concentrated ownership may reduce agency costs it may also be the
cause of agency costs. However, even if concentrated ownership causes agency costs
this effect may be outweighed by bene?ts to the ?rm in the form of contributions of
entrepreneurial ability, talent and personality, and the desire to uphold family
reputation and ensure the ?rm’s survival. The expected performance effect of
ownership concentration is thus unclear and there appears to exist a trade-off between
the costs and bene?ts of concentrated ownership. Therefore, assessment of the overall
impact of ownership concentration on performance is an empirical issue, which we
address in this paper in relation to Bangladesh.
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2.2 Review of the literature
Empirical studies that apply a simultaneous equations approach to examine the
ownership-?rm performance relationship report a variety of results. They include:
.
no causality;
.
causality;
.
reverse causality (that is, ?rm performance determines ownership); and
.
co-deterministic relationship (that is, ?rm performance and ownership
simultaneously determine each other).
Studies such as Loderer and Martin (1997), Cho (1998), Demsetz and Villalonga (2001),
Bohren and Odegaard (2001, 2006) and Farooque et al. (2007a, b) con?rm the existence
of a reverse causality whereby performance appears to determine the degree of
managerial ownership. Agrawal and Knoeber (1996) and Firth et al. (2002) construct a
complex system of simultaneous equations but fail to ?nd any in?uence of ownership
on performance. Fernandez and Gomez (2002) also ?nd no in?uence of ownership on
?rmperformance. However, ina similar study, Prevost et al. (2002) report positive as well
as negative in?uences of insider ownership and ownership concentration, respectively,
on performance. Han et al. (1999) ?nd similar ?ndings for several European countries
and Japan.
Studies documenting a bi-directional relationship explore a “joint-determination” or a
“co-determination” hypothesis due to the simultaneous nature of the process
determining ownership structure and corporate performance (Chung and Pruitt, 1996).
The only published studies showing a co-deterministic relationship are Chung and
Pruitt (1996) in the USA, Davies et al. (2005) in the UK and Kapopoulos and Lazaretou
(2007) in Greece. Chung and Pruitt (1996) consider executive ownership (CEOownership
and CEO compensation) and Tobin’s Q as endogenous in a simultaneous equations
framework and their ?ndings show a strong positive correlation between executive
ownership and ?rm performance, in both directions: ownership driving performance
and vice-versa.. That is, although CEOequity ownership positively in?uences Tobin’s Q
(the ?rm performance measure used in the study), Tobin’s Q also in?uences ownership,
thereby con?rming a co-deterministic relationship between the two. Similarly, Davies
et al. (2005) document intheir cross-sectional studythat managerial share ownership and
Tobin’s Qare co-determined. Considering managerial share ownership and Tobin’s Qas
endogenous in a simultaneous equations system, they ?nd that although managerial
ownership levels are positively determined by corporate performance, corporate
performance itself is determined, in part, by managerial ownership.
Kapopoulos and Lazaretou (2007) also document that both ?rm performance and
ownership are positive predictors of each other. However, while the relationship is
signi?cant for important shareholders it is only weak for managerial shareholders.
Motivated by Davies et al. (2005), both Khan et al. (2007) and Yarram et al. (2007) have
studied the ownership concentration – performance relationship but failed to ?nd the
co-deterministic relationship between managerial share ownership and Tobin’s Q,
respectively, for Australian and Malaysian listed ?rms.
3. Governance features and institutional setting in Bangladesh
The corporate governance system in Bangladesh is a hybrid of the Anglo-American
outsider-dominated market model (rules and compliance based) and the German-Japanese
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insider-dominated bank-based control model (relationship based) (Farooque et al., 2007a).
However, recent trends in corporate control and governance practice in Bangladesh
suggest a shift towards the Anglo-Ameriacn arm’s-length model. Nevertheless, it is often
forgotten that the country’s institutions are far less developed than those found in
Anglo-American settings. Moreover, there are signi?cant differences between the two in
their socio-economic, politico-legal and cultural dimensions. Claessens et al. (1999)
characterise Asian countries as having weak property and shareholders’ rights,
inadequate ?nancial disclosure, inef?cient judicial systems, weak market incentives and
high levels of corruption. The Bangladesh regulatory environment has many of the
features described in Claessens et al. (1999).
Bangladesh inherited Common-law based judicial institutions from British colonial
rule, but there has been failure to nourish and strengthen those institutions and thus
keep pace with other countries who have similar levels of economic development and
share the same colonial legacy. In Bangladesh, the legal and regulatory institutions are
still weak, relatively unsophisticated and, due to poor enforcement of whatever
provisions there are to protect minority shareholder rights and creditor rights, virtually
ineffective in most instances (Farooque et al., 2007a, b). Dif?culties also arise from
excessive delays in securing legal outcomes and enforcement due to a
near-insurmountable backlog of pending lawsuits in poorly equipped courts with
inadequate logistic support and unskilled judges and lawyers[1]. The problem is only
exacerbated by selective enforcement of law due to the fact that lower court judges are
perceived to be vulnerable to bribery and political interference, neither of which is
conducive to a free judiciary[2].
The equity market in Bangladesh is underdeveloped. It is characterised by limited
liquidity and is vulnerable to carefully engineered arti?cial manipulation by a handful of
traders and issuers due to opaque trading rules and the weakness of the SEC in
performing its oversight function. Safeguards against insider trading appear to be
ineffective and thin trading still dominates the pricing of many securities (Solaiman,
2006). Prowse (1999) concludes that the ?nancial markets have not functioned well in the
East and South-East Asian countries. Although stock markets in Bangladesh have been
found to be ef?cient in the “weak-form” (Alam et al., 1999; Islam and Khaled, 2005), the
market is still constrained by regulatory de?ciencies and lack of consistent enforcement.
It lacks an active takeover market, strong incentive contracts and independent directors.
Further dif?culties lie in the perceived presence of market irregularities and undesirable
practices such as deception of investors, default on payments, insider trading and price
manipulation, evasion of tax and excise duty and disrespect for the rights of minority
and institutional shareholders (Solaiman, 2005). The absence of market-based control
mechanisms has resulted in insider-dominated governance mechanisms in Bangladesh.
Ownership-based monitoring has become the dominant governance control mechanism
(Farooque et al, 2007a). Owing to weak investor protection and market incentives,
corporate share ownership is predominantly concentrated in the hands of a few
shareholders, who are generally family investors but occasionally government or
foreign investors. Most ?rms are either family-owned or controlled by substantial
shareholders andmanagements are effectivelyanextended armof the dominant owners.
Firms are closely-held, mainly small and medium-sized and corporate boards
owner-driven (Farooque et al., 2007b). Consequently, most of the companies have
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executive directors, CEO and a chairman belonging to the same controlling family or to
government (in case of state-owned enterprises) (Farooque et al., 2007a, b).
Given these institutional features, Bangladesh ?rms might have high agency costs
arising from the con?ict between the dominant majority and minority shareholders
(Farooque et al., 2007a, b). The Top-5 shareholders, on average, hold more than
50 per cent of a ?rm’s outstanding stocks (Farooque et al., 2007a). Thus, there remains
extensive scope for expropriation of ?rm wealth. It is a common perception that core
owners or families engage in self-dealing, default on loan repayments (typically
arranged from a state-owned, low accountability, ?nancial institution) and hold back
from payment of dividends on equity raised. They are perceived to do just enough to
protect their interest as part of the close nexus between the imperfect market, and the
legal and institutional set-up detrimental to small investors’ interests. Despite the
common support for these allegations of wealth expropriation, there is little systematic
empirical evidence on the allegations. This paper sets out to meet that gap.
4. The hypothesis and the model
The following H0 is tested:
H0. There is no association between ownership concentration and ?rm
performance.
If the results show a signi?cant positive co-deterministic relationship between
ownership concentration and ?rm performance, it would indicate that ownership
concentration and ?rm performance simultaneously impact each other. It would also
suggest that the ownership restriction imposed by the SEC of holding not more than
10 per cent of the common shares is unjusti?ed and detrimental to the interest of listed
?rms in Bangladesh.
To model the relationship between ownership concentration and ?rm performance,
we follow Demsetz and Villalonga (2001) and studies such as Bohren and Odegaard
(2006) and adopt a simultaneous equations system. We use ROA and log Tobin’s Q as
the measures of ?rm performance and Top-1 shareholding as the measure of
ownership concentration. The equations are as follows:
Performance equation
ROA or log Tobin’s Q ¼ ƒ(Top-1 shareholding, institutional shareholding, institutional
shareholding squared, board income (spline 1, 2 and 3), non-executive directors ratio, CEO
dummy, leadership structure dummy, CEO horizon, big 4 audit dummy, dividend per share,
debt ratio, log sales, investment expense ratio, advertising expense ratio and earning volatility).
Ownership concentration equation
Top-1 shareholding ¼ ƒ(ROA or log Tobin’s Q, institutional shareholding, government
shareholding, minority shareholding, board size, board income ratio, CEO horizon, leadership
structure dummy, ?rm age, debt ratio, log assets, investment ratio, liquidity ratio and pro?t
volatility).
The above model consists of two equations with ?rm performance (measured by ROA
and log Tobin’s Q in alternative models) and ownership concentration (measured by
Top-1 shareholding) as endogenous variables. Tobin’s Q and ROA are widely used as
measures of corporate performance. The former is a market-based or hybrid measure
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while the latter is an accounting measure. We estimate Tobin’s Q in its modi?ed
version as used by Chung and Pruitt (1994) and Perfect and Wiles (1994).
Prior studies have used levels of ownership concentration other than Top-1, such as
Top-5, Top-10, important shareholding or board shareholding. Some adopt a
“Her?ndahl index” to represent ownership concentration. In this study, we chose Top-1
shareholder’s ownership concentration for several reasons. First, top shareholder’s
average concentration of shares in our sample of ?rms is about 25 per cent of the total
outstanding shares, while the average shareholding of Top-5, 10 or 20 shareholders
exceeds the 50 per cent level, conferring absolute control. Therefore, it is plausible to
use a lower range of ownership concentration to reveal its effects on performance and
compare with similar studies. Second, a Her?ndahl index cannot be used because of
lack of the necessary data. Third, conventionally, Top-1 shareholder is typically the
founder or descendant of the founder or a representative of the dominant family,
government or foreign owner (as the case may be), who often assumes the role of CEO
and/or chairman of the ?rm, or nominates someone to these positions. Therefore, the
results can shed light on whether or not the founder or family owners add to
performance.
In addition to the endogenous variables, the equations include a number of variables
that proxy for alternative governance mechanisms or are ?rm-speci?c variables that
act as controls. Several of the variables are common to both equations. The variables
included in the equations system are relevant to emerging markets and re?ect
contextual corporate governance and ?rm characteristics. No macro-economic or
non-economic explanatory variables are included in the model.
5. Empirical results and discussion
5.1 Description of the data
We use data collected from the Dhaka Stock Exchange (DSE) in Bangladesh for the
period 1995 to 2001. All ?rm-level data were hand collected from company annual
reports for the respective years. The price data for most ?rms was obtained from
DataStreamand the rest fromthe monthly reviews published by the DSE. Starting with
a population of 1,304 ?rm-years, we deleted observations on ?rms who ceased trading
during the period, had negative equity or had missing data for any of the included
variables. This resulted in a truncated unbalanced pooled sample of 567 observations
over a seven-year period.
Table AI in the Appendix presents descriptive statistics on our sample. The average
(median) Top-1 shareholding is 0.249 (0.225), which is quite high in comparison to those
typically found in developed economies. Both the mean and median values of Tobin’s Q
are .1, namely 1.254 and 1.004, respectively, thus suggesting favourable growth
prospects on average for the sample ?rms. The mean (median) of ROA is 0.083 (0.073).
The means of the other ownership type variables are institutional shareholdings 0.134,
government shareholdings 0.048 and minority shareholding 0.339. The average board
size is 10, of which more than 70 per cent, on average, are non-executive directors. The
average board income including CEO is slightly above Tk.1 million, which represents
nearly 4 per cent of operating expenses. About 68 per cent of CEOs are owner-directors
or a founder or family representative shareholder. The mean CEO-horizon is 10 years,
while the average ?rm age is 16 years. Nearly, 33 per cent of ?rms have one person in
the position of both CEO and chairman and about 36 per cent ?rms have a Big-4
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af?liated audit ?rm. The mean debt ratio of the sample ?rms is 63 per cent while capital
expenditure is about 5 per cent of total assets. Advertising expenditure is very low. The
mean ?rm liquidity (cash ?ow) ratio is low at only 7 per cent of total assets. Finally,
?rm level risks measured in terms of standard deviation of operating income to sales
and of ROE are 4 and 8 per cent, respectively.
The correlation matrices[3] for the variables used in the equations do not suggest
serious multi-collinearity problems and this was con?rmed in tests for
multi-collinearity. Correlation coef?cients of 20.64 and 0.49, respectively, were
observed between board size and the CEO dummy, and board size and the ratio of
non-executive directors. Coef?cients of 0.53, 0.48 and 20.55 were observed for the
correlation of the CEO dummy with, respectively, CEO horizon, the leadership
structure dummy and log assets. The debt ratio was correlated with log assets at 0.54.
Finally, the correlation between total assets and total sales was only 0.31 but when
transformed to logs this increased to 0.81. All other pair-wise correlations were lower
than these cases cited.
5.2 Results
Tables AII and AIII in the Appendix present the results of estimation of the model
using 2SLS[4]. The results suggest a signi?cant positive co-deterministic relationship
between ownership concentration and ?rm performance.
5.2.1 Co-deterministic relationship between ownership concentration and ?rm
performance. Table AII presents the 2SLS estimates for the parameters of the
performance and ownership concentration equations with performance measured by
ROA. In the performance equation, Top-1 shareholder’s ownership has a statistically
signi?cant positive effect on ROA. In the ownership concentration equation, ROA is
found to have a signi?cant positive effect on Top-1 shareholder’s ownership.
These results provide empirical evidence of a co-deterministic relationship between
Top-1 shareholder’s ownership and ROA. As the direction of causality drives
from Top-1 shareholding to ?rm performance as well as from ?rm performance to
Top-1 shareholding, it follows that ?rm performance increases when there is an
increase in Top-1 shareholder’s ownership levels and vice versa. It thus appears that in
Bangladesh, Top-1 shareholder’s ownership concentration is value enhancing, rather
than value destructive.
Table AIII reports the results for 2SLS estimation of the parameters of the model
with log Tobin’s Q as the measure of ?rm performance. The results are similar to those
obtained with ROA as the measure of ?rm performance and thus add support for a
co-deterministic relationship between ownership concentration and ?rm performance.
The present study is the ?rst reported study to have used Top-1 shareholding as the
measure of ownership concentration and, therefore, there are no related studies for
direct comparison. However, in Bangladesh, a dominant Top-1 shareholder in most
cases provides the CEO or Chairman and thus the results obtained are fully consistent
with the ?ndings of Chung and Pruitt (1996) for executive ownership and performance
and those of Davies et al. (2005) between managerial ownership and ?rm performance.
Similarly for Kapopoulos and Lazaretou (2007) in respect of important shareholders
and ?rm performance.
5.2.2 Effects of other governance variables and control variables. The regression
estimates in the ?rm performance equation show a U-shaped relationship between
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institutional shareholding and ?rm performance. The turning points are 23.2 and
27.2 per cent for ROA and Tobin’s Q, respectively (Tables AII and AIII), which suggest
that institutions do not actively monitor ?rm behaviour until their ownership stakes
reach a relatively high level. Institutional shareholding and minority shareholding are
both inversely related to Top-1 shareholding and thus, as expected, both show a
negative impact on Top-1 shareholding. The non-executive directors’ ratio has a
negative coef?cient in both versions of the performance equation. This suggests that
non-executive directors are value destroyers in Bangladesh, although they occupy, on
average, a strong majority of the board (mean 0.721 and median 0.833 in the sample).
This evidence points to the futility of loading boards with family members and relatives
of the dominant shareholders. However, the evidence obtained is not strong as the
coef?cient on the ratio with ROA is signi?cant only at the 10 per cent level and it is not
signi?cant with log Tobin’s Q.
The relationship between board income and ?rm performance is mixed. The results
suggest that board income above Tk 0.15 m has a negative impact on performance.
However, while the sign of the coef?cients is consistent across the two measures of
performance, the signi?cance of the sections of the spline is not consistent. Contrary to
expectations, the CEO variable was not signi?cant in in?uencing performance.
However, the leadership structure variable was strongly signi?cant in explaining
ownership concentration.
CEOhorizon has a positive relationship with performance but the relationship is only
marginally signi?cant for ROA and not signi?cant for log Tobin’s Q. However, CEO
horizon has a signi?cant negative relationship with Top-1 shareholding suggesting that
where there is a dominant shareholder the CEOhas a shorter termof appointment. Firm
age has a strongly signi?cant relationship with ownership concentration suggesting
that older ?rms are more likely to have a dominant shareholder. Dividend per share has a
signi?cant positive effect on both measures of ?rm performance. Investors and the
regulators – the SEC and the Bangladesh Bank – in Bangladesh emphasise dividend
payments as dividends are viewed as an indicator of performance.
Having the audit performed by an international Big-4 af?liated audit ?rm has a
strongly signi?cant effect on performance as measured by log Tobin’s Q but the effect
on performance as measured by ROA is not signi?cant. This leaves uncertainty with
regard to the effect of accounting and audit quality control mechanisms in enhancing
corporate performance and protecting minority shareholders’ interest. The results are
surprising as the presence of a Big-4 af?liated audit ?rm would be expected to
constrain discretionary behaviour of insiders and the Top-1 shareholder and promote
con?dence among investors in the ?rm. The debt ratio has a strongly signi?cant
negative relationship with Top-1 shareholding but the relationship with performance
is mixed. The relationship with ROA is negative and strongly signi?cant but it is not
signi?cant with log Tobin’s Q. The latter is surprising as a higher debt ratio might be
expected to add to performance through additional monitoring.
As regards the control variables, the results are mixed but nevertheless broadly
consistent with expectations. Log sales has a signi?cant positive relationship with
ROA but the relationship with log Tobin’s Q is not signi?cant. Log assets is signi?cant
in the ownership concentration equation with ROA as the measure of performance but
only marginally signi?cant with log Tobin’s Q as the measure of performance. The
investment and advertising expenditure ratios have a signi?cant positive relationship
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with both measures of ?rm performance. These positive effects are consistent with
growth having a positive impact on ?rm performance.
Earnings volatility is not signi?cant in the performance equation with either
measure of performance. Pro?t volatility is marginally signi?cant in the ownership
concentration equation with log Tobin’s Qas the measure of performance. The liquidity
ratio is strongly signi?cant in the ownership equation with ROA as the performance
measure but is not signi?cant with log Tobin’s Q as the measure of performance.
6. Conclusion
Using a simultaneous equations model, this study provides new evidence of a
co-deterministic relationship between ownership concentration and ?rm performance
in the context of an emerging economy. Whether the evidence can be generalised to
other emerging economies or to the wider context of developed economies is a matter to
be resolved by future research. This study is the ?rst to consider Top-1 shareholder’s
ownership as the measure of ownership concentration but the results obtained are
similar to those of earlier studies examining closely related variables (Chung and
Pruitt, 1996; Davies et al., 2005; Kapopoulos and Lazaretou, 2007). The use of Top-1
shareholding as the measure of ownership concentration facilitates consideration of the
possible contribution of the founder or founder-family on performance – which is an
important feature of the corporate sector in emerging markets. In Bangladesh, a good
number of the family owned ?rms are among the top rated successful ?rms. High
ownership concentration of founder-families is not commonly found in developed
economies while in emerging markets founder-family ownership concentration acts as
an alternative governance mechanism substituting for strong and effective legal
backing and other market-driven monitoring mechanisms.
This study also contributes to the more fundamental debate about the applicability
and/or transferability of Anglo-Saxon corporate governance models to developing and
emerging market economies, such as Bangladesh. The study thus reinforces the
concern that mere duplication of Western governance models (as typically imposed by
agencies such as the World Bank, IMF and ADB) may not work for emerging markets
due to the different socio-economic and institutional settings prevailing in such
markets. Co-existence of local, home grown phenomena, such as Top-1 shareholder
dominance, with the desirable Western mechanisms, such as creditor and minority
protection laws, may yield the best results for emerging economies.
A critical review of the Bangladesh institutional and corporate settings suggests
that the country lags far behind developed economies in establishing ef?cient external
sources of control for the corporate sector and adequate enforcement mechanisms to
ensure compliance. The country’s prevailing business traditions and corporate
customs offer little incentive for implementing sound corporate governance practices.
However, in spite of the serious weaknesses in governance structures, the empirical
?ndings of this study support the view that a Top-1 dominant shareholder enhances
performance rather than expropriates the wealth of the other shareholders. The
evidence that Top-1 shareholding and ?rm performance are co-determined indicates
that the Top-1 shareholder has suf?cient incentives to contribute to ?rm performance.
The observed co-deterministic relationship indicates that the founder-family or the
Top-1 shareholder in Bangladesh has an indispensable role. The results provide mixed
evidence on the contribution to performance made by the other internal governance
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mechanisms such as board income, non-executive directors and CEO-related variables.
However, quasi external governance mechanisms such as institutional investors and
dividend per share appear to have a role in in?uencing ?rm performance, phenomena
that merit the attention of policy makers.
This study, therefore, suggests that the policy makers in Bangladesh should revisit
their attempt to limit the founder-family ownership holdings to 10 per cent. The evidence
indicates that Top-1 shareholding at levels of, on average 25 per cent, is performance
enhancing and, therefore, constraints setting arbitrary limits on ownership could be
detrimental to ?rm performance and hence, more generally, growth of the economy.
Instead, the aim should be to balance the home-grown unique features, such as a Top-1
dominant shareholder, with the Western mechanisms such as institutional activism,
debt-holder monitoring and audit quality that ?t the socio-economic environment of the
country. The challenge is to strengthen other governance mechanisms in support of
existing ownership concentration for sustained improvement in corporate governance.
Notes
1. A recent newspaper report claims that there are 270,000 lawsuits awaiting an appeal hearing
in the High Court Division of Bangladesh Supreme Court.
2. A survey administered in 2005 by Transparency International revealed that the country’s
lower courts were perceived to be the most corrupt sector followed by the Police. For more on
perceived corruption in Bangladesh, see Belal and Owen (2007).
3. For space reasons the correlation matrices are not reported here but are available from the
authors upon request.
4. The model was also estimated using OLSs but the results obtained were similar to the 2SLS
results and are, therefore, not reported here.
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Corresponding author
Omar Al Farooque can be contacted at: [email protected]
To purchase reprints of this article please e-mail: [email protected]
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g
0
.
2
4
9
0
.
2
2
5
0
.
1
8
2
0
.
0
1
9
0
.
8
1
9
I
n
s
t
i
t
u
t
i
o
n
a
l
s
h
a
r
e
h
o
l
d
i
n
g
0
.
1
3
4
0
.
1
0
6
0
.
1
3
3
0
.
0
0
0
.
5
8
1
G
o
v
e
r
n
m
e
n
t
s
h
a
r
e
h
o
l
d
i
n
g
0
.
0
4
8
0
.
0
0
0
.
1
3
6
0
.
0
0
0
.
6
6
M
i
n
o
r
i
t
y
s
h
a
r
e
h
o
l
d
i
n
g
0
.
3
3
9
0
.
3
4
2
0
.
1
6
4
0
.
0
0
0
.
7
7
6
B
o
a
r
d
i
n
c
o
m
e
(
T
k
m
i
l
l
.
)
1
.
0
8
9
0
.
4
9
1
.
6
9
6
0
.
0
0
1
1
.
4
1
B
o
a
r
d
s
i
z
e
9
.
5
0
7
.
0
0
6
.
9
9
6
3
3
7
B
o
a
r
d
i
n
c
o
m
e
r
a
t
i
o
0
.
0
4
0
.
0
1
5
0
.
0
6
0
.
0
0
0
.
3
3
N
o
n
-
e
x
e
c
u
t
i
v
e
d
i
r
e
c
t
o
r
s
’
r
a
t
i
o
0
.
7
2
1
0
.
8
3
3
0
.
2
7
1
0
.
0
0
0
.
9
7
C
E
O
d
u
m
m
y
(
n
o
.
o
f
c
a
s
e
s
)
3
8
7
C
E
O
h
o
r
i
z
o
n
9
.
9
7
8
.
0
0
7
.
2
0
8
1
3
1
L
e
a
d
e
r
s
h
i
p
s
t
r
u
c
t
u
r
e
d
u
m
m
y
(
n
o
.
o
f
c
a
s
e
s
)
1
8
9
B
i
g
-
4
a
u
d
i
t
d
u
m
m
y
(
n
o
.
o
f
c
a
s
e
s
)
2
0
6
F
i
r
m
a
g
e
1
5
.
6
5
1
5
.
0
0
7
.
6
8
3
2
4
1
D
i
v
i
d
e
n
d
s
p
e
r
s
h
a
r
e
(
T
k
)
1
1
.
5
4
2
4
.
9
5
1
2
4
.
1
9
5
0
.
0
0
2
5
0
.
0
0
D
e
b
t
(
T
k
m
i
l
l
.
)
2
1
1
2
.
8
7
3
2
6
0
.
4
5
5
9
4
4
.
0
9
2
1
.
2
0
4
6
9
1
3
.
8
2
D
e
b
t
r
a
t
i
o
0
.
6
3
2
0
.
6
4
8
0
.
2
2
6
0
.
0
3
1
.
0
0
I
n
v
e
s
t
m
e
n
t
e
x
p
.
(
T
k
m
i
l
l
.
)
3
3
.
0
0
1
6
.
9
5
9
6
.
9
7
8
0
.
0
0
1
0
3
0
.
5
7
I
n
v
e
s
t
m
e
n
t
e
x
p
r
a
t
i
o
0
.
0
4
6
0
.
0
1
3
0
.
0
8
7
0
.
0
0
0
.
7
8
8
A
d
v
e
r
t
i
s
i
n
g
e
x
p
.
(
T
k
m
i
l
l
.
)
4
.
8
7
4
0
.
5
2
1
6
.
5
3
9
0
.
0
0
1
9
9
.
5
8
A
d
v
e
r
t
i
s
i
n
g
e
x
p
.
r
a
t
i
o
0
.
0
0
6
0
.
0
0
1
0
.
0
2
1
0
.
0
0
0
.
2
0
4
C
a
s
h
?
o
w
(
T
k
m
i
l
l
.
)
5
8
.
9
7
2
2
4
.
3
5
1
0
1
.
8
3
2
2
8
2
.
3
5
7
7
9
.
8
4
L
i
q
u
i
d
i
t
y
r
a
t
i
o
0
.
0
6
7
0
.
0
5
4
0
.
0
7
2
2
0
.
2
2
0
.
6
5
F
i
r
m
s
i
z
e
–
s
a
l
e
s
(
T
k
m
i
l
l
.
)
6
7
5
.
9
9
7
2
6
2
.
6
4
1
8
1
6
.
5
6
1
1
.
1
7
2
0
0
1
0
.
1
1
F
i
r
m
s
i
z
e
–
a
s
s
e
t
s
(
T
k
m
i
l
l
.
)
2
3
8
0
.
6
1
7
4
2
0
.
2
6
6
1
7
1
.
6
7
6
9
.
0
0
4
9
5
5
1
.
8
7
F
i
r
m
-
l
e
v
e
l
r
i
s
k
(
e
a
r
n
i
n
g
v
o
l
a
t
i
l
i
t
y
)
0
.
0
4
4
0
.
0
1
6
0
.
2
4
5
0
.
0
0
5
.
3
8
4
F
i
r
m
-
l
e
v
e
l
r
i
s
k
(
p
r
o
?
t
v
o
l
a
t
i
l
i
t
y
)
0
.
0
8
4
0
.
0
1
6
0
.
2
9
7
0
.
0
0
3
.
5
1
Table AI.
Descriptive statistics
An emerging
economy
187
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
1
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
V
a
r
i
a
b
l
e
s
P
e
r
f
o
r
m
a
n
c
e
e
q
u
a
t
i
o
n
O
w
n
e
r
s
h
i
p
c
o
n
c
e
n
t
r
a
t
i
o
n
e
q
u
a
t
i
o
n
C
o
n
s
t
a
n
t
0
.
0
3
0
(
1
.
4
5
3
)
0
.
3
8
7
(
9
.
8
4
8
)
*
*
*
T
o
p
-
1
s
h
a
r
e
h
o
l
d
i
n
g
0
.
0
9
8
(
4
.
3
0
2
)
*
*
*
R
O
A
2
.
0
6
9
(
6
.
0
6
9
)
*
*
*
I
n
s
t
i
t
u
t
i
o
n
a
l
s
h
a
r
e
h
o
l
d
i
n
g
2
0
.
1
2
0
(
2
2
.
0
9
8
)
*
*
2
0
.
2
6
5
(
2
5
.
8
0
2
)
*
*
*
(
I
n
s
t
i
t
u
t
i
o
n
a
l
s
h
a
r
e
h
o
l
d
i
n
g
)
2
0
.
2
5
9
(
1
.
8
2
7
)
*
M
i
n
o
r
i
t
y
s
h
a
r
e
h
o
l
d
i
n
g
2
0
.
3
5
8
(
2
9
.
2
3
9
)
*
*
*
G
o
v
e
r
n
m
e
n
t
s
h
a
r
e
h
o
l
d
i
n
g
0
.
3
7
6
(
7
.
9
5
5
)
*
*
*
B
o
a
r
d
s
i
z
e
2
0
.
0
0
8
(
2
8
.
4
5
2
)
*
*
*
N
o
n
-
e
x
e
c
u
t
i
v
e
d
i
r
e
c
t
o
r
s
’
r
a
t
i
o
2
0
.
0
1
9
(
2
1
.
6
4
1
)
*
B
o
a
r
d
i
n
c
o
m
e
1
(
u
p
t
o
T
k
0
.
1
5
m
)
0
.
1
1
2
(
1
.
6
1
4
)
B
o
a
r
d
i
n
c
o
m
e
2
(
T
k
0
.
1
5
-
0
.
7
5
m
)
2
0
.
0
5
1
(
2
3
.
0
8
7
)
*
*
*
B
o
a
r
d
i
n
c
o
m
e
3
(
o
v
e
r
T
k
0
.
7
5
m
)
2
0
.
0
0
4
(
2
1
.
7
2
9
)
*
B
o
a
r
d
i
n
c
o
m
e
r
a
t
i
o
2
0
.
1
0
8
(
2
1
.
1
8
2
)
C
E
O
d
u
m
m
y
0
.
0
0
6
(
0
.
6
7
8
)
L
e
a
d
e
r
s
h
i
p
s
t
r
u
c
t
u
r
e
d
u
m
m
y
2
0
.
0
0
9
(
2
1
.
3
0
1
)
0
.
0
3
4
(
2
.
8
0
3
)
*
*
*
C
E
O
h
o
r
i
z
o
n
0
.
0
0
1
(
1
.
7
8
4
)
*
2
0
.
0
0
5
(
2
5
.
0
4
0
)
*
*
*
F
i
r
m
a
g
e
0
.
0
0
6
(
6
.
7
2
6
)
*
*
*
D
i
v
i
d
e
n
d
p
e
r
s
h
a
r
e
0
.
0
0
0
(
2
.
5
7
3
)
*
*
*
B
i
g
-
4
a
u
d
i
t
d
u
m
m
y
2
0
.
0
0
4
(
2
0
.
6
0
5
)
D
e
b
t
r
a
t
i
o
2
0
.
1
7
1
(
2
4
.
8
0
3
)
*
*
*
2
0
.
1
8
3
(
2
5
.
2
3
6
)
*
*
*
L
o
g
s
a
l
e
s
0
.
0
3
3
(
5
.
4
5
3
)
*
*
*
L
o
g
a
s
s
e
t
s
0
.
0
2
1
(
2
.
1
3
0
)
*
*
I
n
v
e
s
t
m
e
n
t
r
a
t
i
o
0
.
0
6
4
(
2
.
0
6
5
)
*
*
0
.
0
8
9
(
1
.
4
7
0
)
A
d
v
e
r
t
i
s
i
n
g
r
a
t
i
o
0
.
9
0
1
(
6
.
2
5
5
)
*
*
*
E
a
r
n
i
n
g
v
o
l
a
t
i
l
i
t
y
2
0
.
0
1
5
(
2
1
.
3
5
3
)
P
r
o
?
t
v
o
l
a
t
i
l
i
t
y
2
0
.
0
0
7
(
2
0
.
3
4
7
)
L
i
q
u
i
d
i
t
y
r
a
t
i
o
2
1
.
3
0
8
(
2
4
.
2
9
7
)
*
*
*
n
5
6
7
5
6
7
A
d
j
u
s
t
e
d
R
2
0
.
2
7
2
7
0
.
5
9
1
7
F
-
s
t
a
t
i
s
t
i
c
1
3
.
4
8
6
*
*
*
5
9
.
5
8
7
*
*
*
N
o
t
e
:
S
i
g
n
i
?
c
a
n
c
e
a
t
:
*
1
0
,
*
*
5
,
a
n
d
*
*
*
1
p
e
r
c
e
n
t
c
o
n
?
d
e
n
c
e
l
e
v
e
l
u
s
i
n
g
t
w
o
-
t
a
i
l
e
d
t
e
s
t
Table AII.
Model with performance
measured by ROA
ARJ
23,2
188
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
1
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
V
a
r
i
a
b
l
e
s
P
e
r
f
o
r
m
a
n
c
e
e
q
u
a
t
i
o
n
O
w
n
e
r
s
h
i
p
c
o
n
c
e
n
t
r
a
t
i
o
n
e
q
u
a
t
i
o
n
C
o
n
s
t
a
n
t
2
0
.
0
4
6
(
2
0
.
8
6
2
)
0
.
4
4
2
(
1
1
.
5
2
6
)
*
*
*
T
o
p
-
1
s
h
a
r
e
h
o
l
d
i
n
g
0
.
3
0
3
(
5
.
1
9
1
)
*
*
*
L
o
g
T
o
b
i
n
’
s
Q
0
.
4
9
7
(
6
.
5
7
4
)
*
*
*
I
n
s
t
i
t
u
t
i
o
n
a
l
s
h
a
r
e
h
o
l
d
i
n
g
2
0
.
6
9
6
(
2
4
.
7
5
0
)
*
*
*
2
0
.
1
4
4
(
2
2
.
7
0
2
)
*
*
*
(
I
n
s
t
i
t
u
t
i
o
n
a
l
s
h
a
r
e
h
o
l
d
i
n
g
)
2
1
.
2
8
0
(
3
.
5
3
1
)
*
*
*
M
i
n
o
r
i
t
y
s
h
a
r
e
h
o
l
d
i
n
g
2
0
.
3
2
0
(
2
7
.
7
1
2
)
*
*
*
G
o
v
e
r
n
m
e
n
t
s
h
a
r
e
h
o
l
d
i
n
g
0
.
3
4
9
(
7
.
4
9
9
)
*
*
*
B
o
a
r
d
s
i
z
e
2
0
.
0
0
9
(
2
9
.
3
8
9
)
*
*
*
N
o
n
-
e
x
e
c
u
t
i
v
e
d
i
r
e
c
t
o
r
s
’
r
a
t
i
o
2
0
.
0
4
2
(
2
1
.
4
1
2
)
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Table AIII.
Model with performance
measured by log
Tobin’s Q
An emerging
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189
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This article has been cited by:
1. Rushdi Md. Rezaur Razzaque, Muhammad Jahangir Ali, Paul R. Mather. 2015. Real earnings management
in family firms: Evidence from an emerging economy. Pacific-Basin Finance Journal . [CrossRef]
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Emerging Markets Review 23, 186-207. [CrossRef]
3. Mohammad Alipour. 2013. An investigation of the association between ownership structure and corporate
performance. Management Research Review 36:11, 1137-1166. [Abstract] [Full Text] [PDF]
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doc_745330395.pdf
The purpose of this paper is to test whether dominant shareholder(s) of a firm enhance
performance in Bangladesh and thus examines the arbitrary moves by the regulatory bodies, in the
name of promoting “good corporate governance”, to restrict ownership concentration.
Accounting Research Journal
Co-deterministic relationship between ownership concentration and corporate
performance: Evidence from an emerging economy
Omar Al Farooque Tony van Zijl Keitha Dunstan Akm Waresul Karim
Article information:
To cite this document:
Omar Al Farooque Tony van Zijl Keitha Dunstan Akm Waresul Karim, (2010),"Co-deterministic relationship
between ownership concentration and corporate performance", Accounting Research J ournal, Vol. 23 Iss 2
pp. 172 - 189
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Raghavan J . Iyengar, J udy Land, Ernest M. Zampelli, (2010),"Does board governance improve
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Co-deterministic relationship
between ownership concentration
and corporate performance
Evidence from an emerging economy
Omar Al Farooque
School of Business, Economics and Public Policy,
University of New England, Armidale, Australia
Tony van Zijl
School of Accounting and Commercial Law,
Victoria University of Wellington, Wellington, New Zealand
Keitha Dunstan
School of Business, Bond University, Gold Coast, Australia, and
Akm Waresul Karim
School of Economics and Business Administration,
Saint Mary’s College of California, Moraga, California, USA
Abstract
Purpose – The purpose of this paper is to test whether dominant shareholder(s) of a ?rm enhance
performance in Bangladesh and thus examines the arbitrary moves by the regulatory bodies, in the
name of promoting “good corporate governance”, to restrict ownership concentration.
Design/methodology/approach – Building on the established literature, a simultaneous equations
approach is applied to model the relationship between ownership concentration and performance and
is tested on a sample of 567 observations on ?rms listed on the Dhaka Stock Exchange over a
seven-year period. The two equations model consists of ?rm performance and ownership
concentration as endogenous variables along with other governance variable.
Findings – The results suggest a signi?cant positive co-deterministic relationship between
ownership concentration and ?rm performance indicating that ownership concentration and ?rm
performance simultaneously impact each other. It suggests that the ownership restriction imposed by
the Securities and Exchange Commission is unjusti?ed and detrimental to ?rm performance/growth in
emerging countries such as Bangladesh.
Practical implications – This new evidence from an emerging market enhances our understanding
of corporate governance in Asian countries. The study has implications for stakeholders, regulators
and policy makers to revisit their attempt to limit founder-family ownership holdings. Instead, their
aimshould be to balance the home-grown unique features, such as a Top-1 dominant shareholder, with
Western governance mechanisms.
Originality/value – The paper is the ?rst to consider Top 1 shareholder’s ownership as the measure
of ownership concentration, which is an important feature of the corporate sector in emerging markets.
In emerging markets, founder-family ownership concentration acts as an alternative governance
mechanism substituting for strong and effective legal backing and other market-driven monitoring
mechanisms.
Keywords Bangladesh, Company performance, Corporate ownership, Emerging markets
Paper type Research paper
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1030-9616.htm
ARJ
23,2
172
Accounting Research Journal
Vol. 23 No. 2, 2010
pp. 172-189
qEmerald Group Publishing Limited
1030-9616
DOI 10.1108/10309611011073250
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1. Introduction
The interaction between ownership structure and ?rmperformance has been the subject
of ongoing debate in the many studies that have appeared in the literature on ?rm
performance, dating from the seminal work of Berle and Means (1932). Early studies in
this literature suggested a unidirectional monotonic relationship between ownership
and ?rm performance but later studies have suggested that the relationship might be
non-monotonic (Morck et al., 1988; McConnell and Servaes, 1990, 1995; Belkaoui and
Pavlik, 1992; Chen et al., 1993; Short and Keasey, 1999; Faccio and Lasfer, 1999;
Holderness et al., 1999; Sarkar and Sarkar, 2000; Davies et al., 2005, Farooque et al.,
2007a). The notion of a unidirectional – monotonic or non-monotonic – relationship
between ownership and ?rmperformance was based on the assumption that ownership
is exogenous. This was strongly challenged by Demsetz (1983) and Demsetz and Lehn
(1985). Accordingly, recent empirical studies have been based on the view that
ownership is endogenous and provide evidence of two new dimensions of the
relationship between ownership and ?rmperformance – reverse-way causality (Loderer
and Martin, 1997; Cho, 1998; Demsetz and Villalonga, 2001; Bohren and Odegaard, 2001,
2006; Farooque et al., 2007b) and two-way causality (“co-deterministic” relationship)
(Chung and Pruitt, 1996; Davies et al., 2005; Kapopoulos and Lazaretou, 2007).
To date, emerging economies have been grossly underrepresented in the corporate
governance research literature. This study is therefore intended to contribute to
bridging that gap and although it deals with Bangladesh, its ?ndings may generalise to
other emerging economies, particularly those in Asia. Given that emerging economies
tend to have signi?cantly different governance and institutional arrangements, study of
the ownership – ?rmperformance relationship in that context could potentially provide
new evidence on the relationship that might be of interest not only to emerging
economies but also to developed economies. For emerging economies, study of the
relationship may provide insights on whether there is a need to develop governance
arrangements that are speci?c to a particular country or a number of countries or
whether models that are tested elsewhere, albeit in different socio-economic settings,
could be transported to emerging economies and expected to be as effective. This issue is
of particularly importance at the present time in Bangladesh as the Securities and
Exchange Commission (SEC) has recently ruled to limit the founder-family ownership
threshold to just 10 per cent and the number of family directors to just one. This
directive, issued by the SECin January 2006, and apparently supported by Bangladesh’s
development partners such as the World Bank, International Monetary Fund (IMF) and
Asian Development Bank (ADB), exempli?es how an arbitrary ruling can lead to
governance structures that may be value destructive rather than value enhancing. In
another arbitrary move, the Banking Companies Act of 1991 was amended in 2007 to
inter alia limit the number of directors in commercial banks to thirteen (Bangladesh
Bank, 2007). Although this was claimed to have been done with the aim of promoting
“good corporate governance” in the banking sector, the link between the number of
directors and the quality of governance is open to question. More recently, the
Bangladesh Bank (central bank) has ruled that each bank must appoint two directors
from among the depositors of the bank. Not surprisingly, this move was strongly
resisted by bank directors and with the result that the regulator has had to compromise
by calling for the appointment of independent directors rather than depositor directors.
An emerging
economy
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This paper tests whether dominant shareholders (and the founders or family owners)
of a ?rm enhance performance. To examine this relationship, we measure ownership in
terms of the concentration in the hands of the largest shareholder (henceforth, “Top-1
shareholder”) and thus empirically examine the basis for the Bangladesh SEC’s
directive prohibiting shareholding concentration in excess of 10 per cent for any family,
including that of the founder. In most cases the Top-1 shareholder is the founder, or the
chief executive of?cer (CEO) or Chairman or both and has a strong presence in the
boardroom. Thus, a study testing whether there is a link between Top-1 shareholding
levels and ?rmperformance would contribute to the literature by providing evidence on
such a link (if any) in addition to the effect of the whole board’s ownership on corporate
performance, while controlling for the other governance mechanisms in place
(Farooque et al., 2007a, b). This evidence can also be compared with the related evidence
from studies on developed economies. In a similar fashion, our earlier work
Farooque et al.(2007a, b) both provide evidence of a reverse causality relationship in the
simultaneous equation models (two stage least squares (2SLS) models) whereby
performance measures (e.g. log Tobins Q, return on assets (ROA) in Farooque et al.
(2007b) and log market to book value of equity (MBVE) in Farooque et al. (2007a))
appear to determine the degree of managerial (board) ownership in Bangladesh listed
?rms, consistent with the evidence from studies on developed economies. Apart from
explanations on endogeneity concern, Farooque et al. (2007a) also con?rm one-way
causality of non-linear/non-monotonic relationship between managerial (board)
ownership and performance measure (e.g. log MBVE) in the single equation model
(ordinary least square (OLS) model), as evident in developed country based studies.
The rest of this paper is organized as follows. Section 2 considers the theoretical
underpinnings of the ownership concentration and performance relationship and
reviews studies that apply a simultaneous equations approach to test the relationship.
Section 3 brie?y sketches the governance and institutional setting in Bangladesh.
Section 4 develops the hypothesis and outlines the research method, while Section 5
presents the empirical ?ndings. Finally, Section 6 draws the conclusions to the paper.
2. Theoretical foundation and review of the literature
2.1 Theoretical foundation
Corporate governance research addresses the agency con?ict arising in ?rms from the
separation of ownership from control. Underlying the potential for agency con?ict is
the view of the ?rm as a nexus of contracts among self-interested parties who
contribute capital, expertise, labour and other services to the ?rm (Alchian and
Demsetz, 1972; Jensen and Meckling, 1976; Fama and Jensen, 1983a). Dispersed
shareholders (outsiders) suffer from collective action and free-rider problems and have
little incentive to monitor managers (insiders). Thus, the potential for con?icts of
interest between dispersed shareholders and managers is likely to impose signi?cant
agency costs on shareholders ( Jensen and Meckling, 1976; Williamson, 1979; Fama and
Jensen, 1983b; Hart and Moore, 1990).
La Porta et al. (1999) survey corporate ownership around the world and ?nd that
many listed ?rms in countries other than the USA and the UK have a controlling
shareholder owning more than 20 per cent or even 30 per cent of ?rm’s outstanding
shares. A large shareholding may act as an effective means of reducing agency costs,
in particular, in the absence of adequate legal protection for minority shareholders
ARJ
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(Shleifer and Vishny, 1986, 1997; Grossman and Hart, 1980). Large shareholders can
resolve moral hazard and free-rider problems, having outright control over ?rms and
their managements. Theycaninternalize both the costs andbene?ts of monitoring. They
have economic incentives and enough voting power to monitor effectively and place
pressure on management or even oust management through a proxy ?ght or a takeover.
Given market imperfections and/or incomplete contracts, ownership concentration
is one of the key governance devices suggested in the literature to minimize these
agency costs. Founder-family leadership is a particular form of concentrated
ownership that can substitute for other corporate governance mechanisms. Denis and
Denis (1994) view founder-family majority ownership as an organizational form
delivering internal monitoring to reduce managerial inef?ciencies. These ?rms remain
viable with no systematic poor performance, as founder-family involvement is value
maximizing due to reputation considerations and the probable risk of sanctions from
non-manager family members. Fama and Jensen (1983a) argue that the long-term
nature of family relationships is advantageous in monitoring and disciplining
managers. This suggests that closely-held ?rm leadership can be an ef?cient corporate
control mechanism to reduce agency cost (Fama and Jensen, 1983a).
A major shareholder adopting a passive stance may appear to have no impact on
management but in fact is likely to pose a threat to management and, therefore, by
virtue of that threat provide a constraint on management discretion. However, a major
shareholder adopting an active role in decision making may have two mutually
exclusive effects: the active role may manifest as monitoring of management in order to
reduce agency costs but it could also manifest as actions aimed at bene?ting the large
shareholder at the expense of minority shareholders, especially when there is
divergence between voting rights and cash-?ow rights (La Porta et al., 1999). Barclay
and Holderness (1989) contend that large shareholders receive substantial private
bene?ts from control; therefore, the interests of large and small shareholders may not
perfectly align. This potential con?ict is widely recognized in the law literature:
[. . .] holders of a majority of the voting shares in a corporation through their ability to elect
and control a majority of the directors and to determine the outcome of shareholders votes,
have tremendous power to bene?t themselves at the expense of minority shareholders
(O’Neal, 1987, p. 125).
The higher the concentration level, the easier it is for the large shareholders to take
self-serving actions to transfer minority shareholders’ wealth into their own hands.
The degree of expropriation by insiders depends on the investment opportunities
available and the cost of such expropriation to the ?rm (La Porta et al., 2000). Durnev
and Kim (2003) suggest that insiders expropriate more when controls in the market are
slack and take less when the market is depressed.
Thus, while concentrated ownership may reduce agency costs it may also be the
cause of agency costs. However, even if concentrated ownership causes agency costs
this effect may be outweighed by bene?ts to the ?rm in the form of contributions of
entrepreneurial ability, talent and personality, and the desire to uphold family
reputation and ensure the ?rm’s survival. The expected performance effect of
ownership concentration is thus unclear and there appears to exist a trade-off between
the costs and bene?ts of concentrated ownership. Therefore, assessment of the overall
impact of ownership concentration on performance is an empirical issue, which we
address in this paper in relation to Bangladesh.
An emerging
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2.2 Review of the literature
Empirical studies that apply a simultaneous equations approach to examine the
ownership-?rm performance relationship report a variety of results. They include:
.
no causality;
.
causality;
.
reverse causality (that is, ?rm performance determines ownership); and
.
co-deterministic relationship (that is, ?rm performance and ownership
simultaneously determine each other).
Studies such as Loderer and Martin (1997), Cho (1998), Demsetz and Villalonga (2001),
Bohren and Odegaard (2001, 2006) and Farooque et al. (2007a, b) con?rm the existence
of a reverse causality whereby performance appears to determine the degree of
managerial ownership. Agrawal and Knoeber (1996) and Firth et al. (2002) construct a
complex system of simultaneous equations but fail to ?nd any in?uence of ownership
on performance. Fernandez and Gomez (2002) also ?nd no in?uence of ownership on
?rmperformance. However, ina similar study, Prevost et al. (2002) report positive as well
as negative in?uences of insider ownership and ownership concentration, respectively,
on performance. Han et al. (1999) ?nd similar ?ndings for several European countries
and Japan.
Studies documenting a bi-directional relationship explore a “joint-determination” or a
“co-determination” hypothesis due to the simultaneous nature of the process
determining ownership structure and corporate performance (Chung and Pruitt, 1996).
The only published studies showing a co-deterministic relationship are Chung and
Pruitt (1996) in the USA, Davies et al. (2005) in the UK and Kapopoulos and Lazaretou
(2007) in Greece. Chung and Pruitt (1996) consider executive ownership (CEOownership
and CEO compensation) and Tobin’s Q as endogenous in a simultaneous equations
framework and their ?ndings show a strong positive correlation between executive
ownership and ?rm performance, in both directions: ownership driving performance
and vice-versa.. That is, although CEOequity ownership positively in?uences Tobin’s Q
(the ?rm performance measure used in the study), Tobin’s Q also in?uences ownership,
thereby con?rming a co-deterministic relationship between the two. Similarly, Davies
et al. (2005) document intheir cross-sectional studythat managerial share ownership and
Tobin’s Qare co-determined. Considering managerial share ownership and Tobin’s Qas
endogenous in a simultaneous equations system, they ?nd that although managerial
ownership levels are positively determined by corporate performance, corporate
performance itself is determined, in part, by managerial ownership.
Kapopoulos and Lazaretou (2007) also document that both ?rm performance and
ownership are positive predictors of each other. However, while the relationship is
signi?cant for important shareholders it is only weak for managerial shareholders.
Motivated by Davies et al. (2005), both Khan et al. (2007) and Yarram et al. (2007) have
studied the ownership concentration – performance relationship but failed to ?nd the
co-deterministic relationship between managerial share ownership and Tobin’s Q,
respectively, for Australian and Malaysian listed ?rms.
3. Governance features and institutional setting in Bangladesh
The corporate governance system in Bangladesh is a hybrid of the Anglo-American
outsider-dominated market model (rules and compliance based) and the German-Japanese
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insider-dominated bank-based control model (relationship based) (Farooque et al., 2007a).
However, recent trends in corporate control and governance practice in Bangladesh
suggest a shift towards the Anglo-Ameriacn arm’s-length model. Nevertheless, it is often
forgotten that the country’s institutions are far less developed than those found in
Anglo-American settings. Moreover, there are signi?cant differences between the two in
their socio-economic, politico-legal and cultural dimensions. Claessens et al. (1999)
characterise Asian countries as having weak property and shareholders’ rights,
inadequate ?nancial disclosure, inef?cient judicial systems, weak market incentives and
high levels of corruption. The Bangladesh regulatory environment has many of the
features described in Claessens et al. (1999).
Bangladesh inherited Common-law based judicial institutions from British colonial
rule, but there has been failure to nourish and strengthen those institutions and thus
keep pace with other countries who have similar levels of economic development and
share the same colonial legacy. In Bangladesh, the legal and regulatory institutions are
still weak, relatively unsophisticated and, due to poor enforcement of whatever
provisions there are to protect minority shareholder rights and creditor rights, virtually
ineffective in most instances (Farooque et al., 2007a, b). Dif?culties also arise from
excessive delays in securing legal outcomes and enforcement due to a
near-insurmountable backlog of pending lawsuits in poorly equipped courts with
inadequate logistic support and unskilled judges and lawyers[1]. The problem is only
exacerbated by selective enforcement of law due to the fact that lower court judges are
perceived to be vulnerable to bribery and political interference, neither of which is
conducive to a free judiciary[2].
The equity market in Bangladesh is underdeveloped. It is characterised by limited
liquidity and is vulnerable to carefully engineered arti?cial manipulation by a handful of
traders and issuers due to opaque trading rules and the weakness of the SEC in
performing its oversight function. Safeguards against insider trading appear to be
ineffective and thin trading still dominates the pricing of many securities (Solaiman,
2006). Prowse (1999) concludes that the ?nancial markets have not functioned well in the
East and South-East Asian countries. Although stock markets in Bangladesh have been
found to be ef?cient in the “weak-form” (Alam et al., 1999; Islam and Khaled, 2005), the
market is still constrained by regulatory de?ciencies and lack of consistent enforcement.
It lacks an active takeover market, strong incentive contracts and independent directors.
Further dif?culties lie in the perceived presence of market irregularities and undesirable
practices such as deception of investors, default on payments, insider trading and price
manipulation, evasion of tax and excise duty and disrespect for the rights of minority
and institutional shareholders (Solaiman, 2005). The absence of market-based control
mechanisms has resulted in insider-dominated governance mechanisms in Bangladesh.
Ownership-based monitoring has become the dominant governance control mechanism
(Farooque et al, 2007a). Owing to weak investor protection and market incentives,
corporate share ownership is predominantly concentrated in the hands of a few
shareholders, who are generally family investors but occasionally government or
foreign investors. Most ?rms are either family-owned or controlled by substantial
shareholders andmanagements are effectivelyanextended armof the dominant owners.
Firms are closely-held, mainly small and medium-sized and corporate boards
owner-driven (Farooque et al., 2007b). Consequently, most of the companies have
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executive directors, CEO and a chairman belonging to the same controlling family or to
government (in case of state-owned enterprises) (Farooque et al., 2007a, b).
Given these institutional features, Bangladesh ?rms might have high agency costs
arising from the con?ict between the dominant majority and minority shareholders
(Farooque et al., 2007a, b). The Top-5 shareholders, on average, hold more than
50 per cent of a ?rm’s outstanding stocks (Farooque et al., 2007a). Thus, there remains
extensive scope for expropriation of ?rm wealth. It is a common perception that core
owners or families engage in self-dealing, default on loan repayments (typically
arranged from a state-owned, low accountability, ?nancial institution) and hold back
from payment of dividends on equity raised. They are perceived to do just enough to
protect their interest as part of the close nexus between the imperfect market, and the
legal and institutional set-up detrimental to small investors’ interests. Despite the
common support for these allegations of wealth expropriation, there is little systematic
empirical evidence on the allegations. This paper sets out to meet that gap.
4. The hypothesis and the model
The following H0 is tested:
H0. There is no association between ownership concentration and ?rm
performance.
If the results show a signi?cant positive co-deterministic relationship between
ownership concentration and ?rm performance, it would indicate that ownership
concentration and ?rm performance simultaneously impact each other. It would also
suggest that the ownership restriction imposed by the SEC of holding not more than
10 per cent of the common shares is unjusti?ed and detrimental to the interest of listed
?rms in Bangladesh.
To model the relationship between ownership concentration and ?rm performance,
we follow Demsetz and Villalonga (2001) and studies such as Bohren and Odegaard
(2006) and adopt a simultaneous equations system. We use ROA and log Tobin’s Q as
the measures of ?rm performance and Top-1 shareholding as the measure of
ownership concentration. The equations are as follows:
Performance equation
ROA or log Tobin’s Q ¼ ƒ(Top-1 shareholding, institutional shareholding, institutional
shareholding squared, board income (spline 1, 2 and 3), non-executive directors ratio, CEO
dummy, leadership structure dummy, CEO horizon, big 4 audit dummy, dividend per share,
debt ratio, log sales, investment expense ratio, advertising expense ratio and earning volatility).
Ownership concentration equation
Top-1 shareholding ¼ ƒ(ROA or log Tobin’s Q, institutional shareholding, government
shareholding, minority shareholding, board size, board income ratio, CEO horizon, leadership
structure dummy, ?rm age, debt ratio, log assets, investment ratio, liquidity ratio and pro?t
volatility).
The above model consists of two equations with ?rm performance (measured by ROA
and log Tobin’s Q in alternative models) and ownership concentration (measured by
Top-1 shareholding) as endogenous variables. Tobin’s Q and ROA are widely used as
measures of corporate performance. The former is a market-based or hybrid measure
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while the latter is an accounting measure. We estimate Tobin’s Q in its modi?ed
version as used by Chung and Pruitt (1994) and Perfect and Wiles (1994).
Prior studies have used levels of ownership concentration other than Top-1, such as
Top-5, Top-10, important shareholding or board shareholding. Some adopt a
“Her?ndahl index” to represent ownership concentration. In this study, we chose Top-1
shareholder’s ownership concentration for several reasons. First, top shareholder’s
average concentration of shares in our sample of ?rms is about 25 per cent of the total
outstanding shares, while the average shareholding of Top-5, 10 or 20 shareholders
exceeds the 50 per cent level, conferring absolute control. Therefore, it is plausible to
use a lower range of ownership concentration to reveal its effects on performance and
compare with similar studies. Second, a Her?ndahl index cannot be used because of
lack of the necessary data. Third, conventionally, Top-1 shareholder is typically the
founder or descendant of the founder or a representative of the dominant family,
government or foreign owner (as the case may be), who often assumes the role of CEO
and/or chairman of the ?rm, or nominates someone to these positions. Therefore, the
results can shed light on whether or not the founder or family owners add to
performance.
In addition to the endogenous variables, the equations include a number of variables
that proxy for alternative governance mechanisms or are ?rm-speci?c variables that
act as controls. Several of the variables are common to both equations. The variables
included in the equations system are relevant to emerging markets and re?ect
contextual corporate governance and ?rm characteristics. No macro-economic or
non-economic explanatory variables are included in the model.
5. Empirical results and discussion
5.1 Description of the data
We use data collected from the Dhaka Stock Exchange (DSE) in Bangladesh for the
period 1995 to 2001. All ?rm-level data were hand collected from company annual
reports for the respective years. The price data for most ?rms was obtained from
DataStreamand the rest fromthe monthly reviews published by the DSE. Starting with
a population of 1,304 ?rm-years, we deleted observations on ?rms who ceased trading
during the period, had negative equity or had missing data for any of the included
variables. This resulted in a truncated unbalanced pooled sample of 567 observations
over a seven-year period.
Table AI in the Appendix presents descriptive statistics on our sample. The average
(median) Top-1 shareholding is 0.249 (0.225), which is quite high in comparison to those
typically found in developed economies. Both the mean and median values of Tobin’s Q
are .1, namely 1.254 and 1.004, respectively, thus suggesting favourable growth
prospects on average for the sample ?rms. The mean (median) of ROA is 0.083 (0.073).
The means of the other ownership type variables are institutional shareholdings 0.134,
government shareholdings 0.048 and minority shareholding 0.339. The average board
size is 10, of which more than 70 per cent, on average, are non-executive directors. The
average board income including CEO is slightly above Tk.1 million, which represents
nearly 4 per cent of operating expenses. About 68 per cent of CEOs are owner-directors
or a founder or family representative shareholder. The mean CEO-horizon is 10 years,
while the average ?rm age is 16 years. Nearly, 33 per cent of ?rms have one person in
the position of both CEO and chairman and about 36 per cent ?rms have a Big-4
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af?liated audit ?rm. The mean debt ratio of the sample ?rms is 63 per cent while capital
expenditure is about 5 per cent of total assets. Advertising expenditure is very low. The
mean ?rm liquidity (cash ?ow) ratio is low at only 7 per cent of total assets. Finally,
?rm level risks measured in terms of standard deviation of operating income to sales
and of ROE are 4 and 8 per cent, respectively.
The correlation matrices[3] for the variables used in the equations do not suggest
serious multi-collinearity problems and this was con?rmed in tests for
multi-collinearity. Correlation coef?cients of 20.64 and 0.49, respectively, were
observed between board size and the CEO dummy, and board size and the ratio of
non-executive directors. Coef?cients of 0.53, 0.48 and 20.55 were observed for the
correlation of the CEO dummy with, respectively, CEO horizon, the leadership
structure dummy and log assets. The debt ratio was correlated with log assets at 0.54.
Finally, the correlation between total assets and total sales was only 0.31 but when
transformed to logs this increased to 0.81. All other pair-wise correlations were lower
than these cases cited.
5.2 Results
Tables AII and AIII in the Appendix present the results of estimation of the model
using 2SLS[4]. The results suggest a signi?cant positive co-deterministic relationship
between ownership concentration and ?rm performance.
5.2.1 Co-deterministic relationship between ownership concentration and ?rm
performance. Table AII presents the 2SLS estimates for the parameters of the
performance and ownership concentration equations with performance measured by
ROA. In the performance equation, Top-1 shareholder’s ownership has a statistically
signi?cant positive effect on ROA. In the ownership concentration equation, ROA is
found to have a signi?cant positive effect on Top-1 shareholder’s ownership.
These results provide empirical evidence of a co-deterministic relationship between
Top-1 shareholder’s ownership and ROA. As the direction of causality drives
from Top-1 shareholding to ?rm performance as well as from ?rm performance to
Top-1 shareholding, it follows that ?rm performance increases when there is an
increase in Top-1 shareholder’s ownership levels and vice versa. It thus appears that in
Bangladesh, Top-1 shareholder’s ownership concentration is value enhancing, rather
than value destructive.
Table AIII reports the results for 2SLS estimation of the parameters of the model
with log Tobin’s Q as the measure of ?rm performance. The results are similar to those
obtained with ROA as the measure of ?rm performance and thus add support for a
co-deterministic relationship between ownership concentration and ?rm performance.
The present study is the ?rst reported study to have used Top-1 shareholding as the
measure of ownership concentration and, therefore, there are no related studies for
direct comparison. However, in Bangladesh, a dominant Top-1 shareholder in most
cases provides the CEO or Chairman and thus the results obtained are fully consistent
with the ?ndings of Chung and Pruitt (1996) for executive ownership and performance
and those of Davies et al. (2005) between managerial ownership and ?rm performance.
Similarly for Kapopoulos and Lazaretou (2007) in respect of important shareholders
and ?rm performance.
5.2.2 Effects of other governance variables and control variables. The regression
estimates in the ?rm performance equation show a U-shaped relationship between
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institutional shareholding and ?rm performance. The turning points are 23.2 and
27.2 per cent for ROA and Tobin’s Q, respectively (Tables AII and AIII), which suggest
that institutions do not actively monitor ?rm behaviour until their ownership stakes
reach a relatively high level. Institutional shareholding and minority shareholding are
both inversely related to Top-1 shareholding and thus, as expected, both show a
negative impact on Top-1 shareholding. The non-executive directors’ ratio has a
negative coef?cient in both versions of the performance equation. This suggests that
non-executive directors are value destroyers in Bangladesh, although they occupy, on
average, a strong majority of the board (mean 0.721 and median 0.833 in the sample).
This evidence points to the futility of loading boards with family members and relatives
of the dominant shareholders. However, the evidence obtained is not strong as the
coef?cient on the ratio with ROA is signi?cant only at the 10 per cent level and it is not
signi?cant with log Tobin’s Q.
The relationship between board income and ?rm performance is mixed. The results
suggest that board income above Tk 0.15 m has a negative impact on performance.
However, while the sign of the coef?cients is consistent across the two measures of
performance, the signi?cance of the sections of the spline is not consistent. Contrary to
expectations, the CEO variable was not signi?cant in in?uencing performance.
However, the leadership structure variable was strongly signi?cant in explaining
ownership concentration.
CEOhorizon has a positive relationship with performance but the relationship is only
marginally signi?cant for ROA and not signi?cant for log Tobin’s Q. However, CEO
horizon has a signi?cant negative relationship with Top-1 shareholding suggesting that
where there is a dominant shareholder the CEOhas a shorter termof appointment. Firm
age has a strongly signi?cant relationship with ownership concentration suggesting
that older ?rms are more likely to have a dominant shareholder. Dividend per share has a
signi?cant positive effect on both measures of ?rm performance. Investors and the
regulators – the SEC and the Bangladesh Bank – in Bangladesh emphasise dividend
payments as dividends are viewed as an indicator of performance.
Having the audit performed by an international Big-4 af?liated audit ?rm has a
strongly signi?cant effect on performance as measured by log Tobin’s Q but the effect
on performance as measured by ROA is not signi?cant. This leaves uncertainty with
regard to the effect of accounting and audit quality control mechanisms in enhancing
corporate performance and protecting minority shareholders’ interest. The results are
surprising as the presence of a Big-4 af?liated audit ?rm would be expected to
constrain discretionary behaviour of insiders and the Top-1 shareholder and promote
con?dence among investors in the ?rm. The debt ratio has a strongly signi?cant
negative relationship with Top-1 shareholding but the relationship with performance
is mixed. The relationship with ROA is negative and strongly signi?cant but it is not
signi?cant with log Tobin’s Q. The latter is surprising as a higher debt ratio might be
expected to add to performance through additional monitoring.
As regards the control variables, the results are mixed but nevertheless broadly
consistent with expectations. Log sales has a signi?cant positive relationship with
ROA but the relationship with log Tobin’s Q is not signi?cant. Log assets is signi?cant
in the ownership concentration equation with ROA as the measure of performance but
only marginally signi?cant with log Tobin’s Q as the measure of performance. The
investment and advertising expenditure ratios have a signi?cant positive relationship
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with both measures of ?rm performance. These positive effects are consistent with
growth having a positive impact on ?rm performance.
Earnings volatility is not signi?cant in the performance equation with either
measure of performance. Pro?t volatility is marginally signi?cant in the ownership
concentration equation with log Tobin’s Qas the measure of performance. The liquidity
ratio is strongly signi?cant in the ownership equation with ROA as the performance
measure but is not signi?cant with log Tobin’s Q as the measure of performance.
6. Conclusion
Using a simultaneous equations model, this study provides new evidence of a
co-deterministic relationship between ownership concentration and ?rm performance
in the context of an emerging economy. Whether the evidence can be generalised to
other emerging economies or to the wider context of developed economies is a matter to
be resolved by future research. This study is the ?rst to consider Top-1 shareholder’s
ownership as the measure of ownership concentration but the results obtained are
similar to those of earlier studies examining closely related variables (Chung and
Pruitt, 1996; Davies et al., 2005; Kapopoulos and Lazaretou, 2007). The use of Top-1
shareholding as the measure of ownership concentration facilitates consideration of the
possible contribution of the founder or founder-family on performance – which is an
important feature of the corporate sector in emerging markets. In Bangladesh, a good
number of the family owned ?rms are among the top rated successful ?rms. High
ownership concentration of founder-families is not commonly found in developed
economies while in emerging markets founder-family ownership concentration acts as
an alternative governance mechanism substituting for strong and effective legal
backing and other market-driven monitoring mechanisms.
This study also contributes to the more fundamental debate about the applicability
and/or transferability of Anglo-Saxon corporate governance models to developing and
emerging market economies, such as Bangladesh. The study thus reinforces the
concern that mere duplication of Western governance models (as typically imposed by
agencies such as the World Bank, IMF and ADB) may not work for emerging markets
due to the different socio-economic and institutional settings prevailing in such
markets. Co-existence of local, home grown phenomena, such as Top-1 shareholder
dominance, with the desirable Western mechanisms, such as creditor and minority
protection laws, may yield the best results for emerging economies.
A critical review of the Bangladesh institutional and corporate settings suggests
that the country lags far behind developed economies in establishing ef?cient external
sources of control for the corporate sector and adequate enforcement mechanisms to
ensure compliance. The country’s prevailing business traditions and corporate
customs offer little incentive for implementing sound corporate governance practices.
However, in spite of the serious weaknesses in governance structures, the empirical
?ndings of this study support the view that a Top-1 dominant shareholder enhances
performance rather than expropriates the wealth of the other shareholders. The
evidence that Top-1 shareholding and ?rm performance are co-determined indicates
that the Top-1 shareholder has suf?cient incentives to contribute to ?rm performance.
The observed co-deterministic relationship indicates that the founder-family or the
Top-1 shareholder in Bangladesh has an indispensable role. The results provide mixed
evidence on the contribution to performance made by the other internal governance
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mechanisms such as board income, non-executive directors and CEO-related variables.
However, quasi external governance mechanisms such as institutional investors and
dividend per share appear to have a role in in?uencing ?rm performance, phenomena
that merit the attention of policy makers.
This study, therefore, suggests that the policy makers in Bangladesh should revisit
their attempt to limit the founder-family ownership holdings to 10 per cent. The evidence
indicates that Top-1 shareholding at levels of, on average 25 per cent, is performance
enhancing and, therefore, constraints setting arbitrary limits on ownership could be
detrimental to ?rm performance and hence, more generally, growth of the economy.
Instead, the aim should be to balance the home-grown unique features, such as a Top-1
dominant shareholder, with the Western mechanisms such as institutional activism,
debt-holder monitoring and audit quality that ?t the socio-economic environment of the
country. The challenge is to strengthen other governance mechanisms in support of
existing ownership concentration for sustained improvement in corporate governance.
Notes
1. A recent newspaper report claims that there are 270,000 lawsuits awaiting an appeal hearing
in the High Court Division of Bangladesh Supreme Court.
2. A survey administered in 2005 by Transparency International revealed that the country’s
lower courts were perceived to be the most corrupt sector followed by the Police. For more on
perceived corruption in Bangladesh, see Belal and Owen (2007).
3. For space reasons the correlation matrices are not reported here but are available from the
authors upon request.
4. The model was also estimated using OLSs but the results obtained were similar to the 2SLS
results and are, therefore, not reported here.
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N
I
V
E
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S
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t
2
1
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1
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R
Y
U
N
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V
E
R
S
I
T
Y
A
t
2
1
:
1
1
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
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Corresponding author
Omar Al Farooque can be contacted at: [email protected]
To purchase reprints of this article please e-mail: [email protected]
Or visit our web site for further details: www.emeraldinsight.com/reprints
ARJ
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Appendix
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Table AI.
Descriptive statistics
An emerging
economy
187
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6
)
*
*
*
D
i
v
i
d
e
n
d
p
e
r
s
h
a
r
e
0
.
0
0
0
(
2
.
5
7
3
)
*
*
*
B
i
g
-
4
a
u
d
i
t
d
u
m
m
y
2
0
.
0
0
4
(
2
0
.
6
0
5
)
D
e
b
t
r
a
t
i
o
2
0
.
1
7
1
(
2
4
.
8
0
3
)
*
*
*
2
0
.
1
8
3
(
2
5
.
2
3
6
)
*
*
*
L
o
g
s
a
l
e
s
0
.
0
3
3
(
5
.
4
5
3
)
*
*
*
L
o
g
a
s
s
e
t
s
0
.
0
2
1
(
2
.
1
3
0
)
*
*
I
n
v
e
s
t
m
e
n
t
r
a
t
i
o
0
.
0
6
4
(
2
.
0
6
5
)
*
*
0
.
0
8
9
(
1
.
4
7
0
)
A
d
v
e
r
t
i
s
i
n
g
r
a
t
i
o
0
.
9
0
1
(
6
.
2
5
5
)
*
*
*
E
a
r
n
i
n
g
v
o
l
a
t
i
l
i
t
y
2
0
.
0
1
5
(
2
1
.
3
5
3
)
P
r
o
?
t
v
o
l
a
t
i
l
i
t
y
2
0
.
0
0
7
(
2
0
.
3
4
7
)
L
i
q
u
i
d
i
t
y
r
a
t
i
o
2
1
.
3
0
8
(
2
4
.
2
9
7
)
*
*
*
n
5
6
7
5
6
7
A
d
j
u
s
t
e
d
R
2
0
.
2
7
2
7
0
.
5
9
1
7
F
-
s
t
a
t
i
s
t
i
c
1
3
.
4
8
6
*
*
*
5
9
.
5
8
7
*
*
*
N
o
t
e
:
S
i
g
n
i
?
c
a
n
c
e
a
t
:
*
1
0
,
*
*
5
,
a
n
d
*
*
*
1
p
e
r
c
e
n
t
c
o
n
?
d
e
n
c
e
l
e
v
e
l
u
s
i
n
g
t
w
o
-
t
a
i
l
e
d
t
e
s
t
Table AII.
Model with performance
measured by ROA
ARJ
23,2
188
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
1
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
V
a
r
i
a
b
l
e
s
P
e
r
f
o
r
m
a
n
c
e
e
q
u
a
t
i
o
n
O
w
n
e
r
s
h
i
p
c
o
n
c
e
n
t
r
a
t
i
o
n
e
q
u
a
t
i
o
n
C
o
n
s
t
a
n
t
2
0
.
0
4
6
(
2
0
.
8
6
2
)
0
.
4
4
2
(
1
1
.
5
2
6
)
*
*
*
T
o
p
-
1
s
h
a
r
e
h
o
l
d
i
n
g
0
.
3
0
3
(
5
.
1
9
1
)
*
*
*
L
o
g
T
o
b
i
n
’
s
Q
0
.
4
9
7
(
6
.
5
7
4
)
*
*
*
I
n
s
t
i
t
u
t
i
o
n
a
l
s
h
a
r
e
h
o
l
d
i
n
g
2
0
.
6
9
6
(
2
4
.
7
5
0
)
*
*
*
2
0
.
1
4
4
(
2
2
.
7
0
2
)
*
*
*
(
I
n
s
t
i
t
u
t
i
o
n
a
l
s
h
a
r
e
h
o
l
d
i
n
g
)
2
1
.
2
8
0
(
3
.
5
3
1
)
*
*
*
M
i
n
o
r
i
t
y
s
h
a
r
e
h
o
l
d
i
n
g
2
0
.
3
2
0
(
2
7
.
7
1
2
)
*
*
*
G
o
v
e
r
n
m
e
n
t
s
h
a
r
e
h
o
l
d
i
n
g
0
.
3
4
9
(
7
.
4
9
9
)
*
*
*
B
o
a
r
d
s
i
z
e
2
0
.
0
0
9
(
2
9
.
3
8
9
)
*
*
*
N
o
n
-
e
x
e
c
u
t
i
v
e
d
i
r
e
c
t
o
r
s
’
r
a
t
i
o
2
0
.
0
4
2
(
2
1
.
4
1
2
)
B
o
a
r
d
i
n
c
o
m
e
1
(
u
p
t
o
T
k
0
.
1
5
m
)
0
.
3
1
5
(
1
.
7
7
3
)
*
B
o
a
r
d
i
n
c
o
m
e
2
(
T
k
0
.
1
5
-
0
.
7
5
m
)
2
0
.
0
3
4
(
2
0
.
8
0
4
)
B
o
a
r
d
i
n
c
o
m
e
3
(
o
v
e
r
T
k
0
.
7
5
m
)
2
0
.
0
0
3
(
2
0
.
4
3
8
)
B
o
a
r
d
i
n
c
o
m
e
r
a
t
i
o
2
0
.
2
8
5
(
2
2
.
9
6
8
)
*
*
*
C
E
O
d
u
m
m
y
2
0
.
0
0
9
(
2
0
.
3
9
5
)
L
e
a
d
e
r
s
h
i
p
s
t
r
u
c
t
u
r
e
d
u
m
m
y
2
0
.
0
0
9
(
2
0
.
5
1
4
)
0
.
0
3
2
(
2
.
5
3
0
)
*
*
*
C
E
O
h
o
r
i
z
o
n
0
.
0
0
2
(
1
.
5
1
6
)
2
0
.
0
0
3
(
2
3
.
0
4
7
)
*
*
*
F
i
r
m
a
g
e
0
.
0
0
5
(
5
.
1
8
5
)
*
*
*
D
i
v
i
d
e
n
d
p
e
r
s
h
a
r
e
0
.
0
0
1
(
1
.
7
8
8
)
*
B
i
g
-
4
a
u
d
i
t
d
u
m
m
y
0
.
0
6
7
(
4
.
0
9
0
)
*
*
*
D
e
b
t
r
a
t
i
o
0
.
0
1
1
(
0
.
2
9
5
)
2
0
.
1
7
7
(
2
5
.
0
9
1
)
*
*
*
L
o
g
s
a
l
e
s
2
0
.
0
0
2
(
2
0
.
1
2
9
)
L
o
g
a
s
s
e
t
s
0
.
0
1
8
(
1
.
7
9
1
)
*
I
n
v
e
s
t
m
e
n
t
r
a
t
i
o
0
.
1
8
2
(
2
.
2
9
2
)
*
*
2
0
.
0
1
6
(
2
0
.
2
6
6
)
A
d
v
e
r
t
i
s
i
n
g
r
a
t
i
o
2
.
6
5
7
(
7
.
2
0
4
)
*
*
*
E
a
r
n
i
n
g
v
o
l
a
t
i
l
i
t
y
0
.
0
1
5
(
0
.
5
1
2
)
P
r
o
?
t
v
o
l
a
t
i
l
i
t
y
0
.
0
3
5
(
1
.
7
1
2
)
*
L
i
q
u
i
d
i
t
y
r
a
t
i
o
2
0
.
0
3
3
(
2
0
.
2
9
4
)
n
5
6
7
5
6
7
A
d
j
u
s
t
e
d
R
2
0
.
3
0
1
1
0
.
5
8
4
8
F
-
s
t
a
t
i
s
t
i
c
1
5
.
3
4
4
*
*
*
5
7
.
9
3
0
*
*
*
N
o
t
e
:
S
i
g
n
i
?
c
a
n
c
e
a
t
:
*
1
0
,
*
*
5
,
a
n
d
*
*
*
1
p
e
r
c
e
n
t
c
o
n
?
d
e
n
c
e
l
e
v
e
l
u
s
i
n
g
t
w
o
-
t
a
i
l
e
d
t
e
s
t
Table AIII.
Model with performance
measured by log
Tobin’s Q
An emerging
economy
189
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
1
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
This article has been cited by:
1. Rushdi Md. Rezaur Razzaque, Muhammad Jahangir Ali, Paul R. Mather. 2015. Real earnings management
in family firms: Evidence from an emerging economy. Pacific-Basin Finance Journal . [CrossRef]
2. Yuan George Shan. 2015. Value relevance, earnings management and corporate governance in China.
Emerging Markets Review 23, 186-207. [CrossRef]
3. Mohammad Alipour. 2013. An investigation of the association between ownership structure and corporate
performance. Management Research Review 36:11, 1137-1166. [Abstract] [Full Text] [PDF]
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
1
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
doc_745330395.pdf