The International Journal of Finance * VoL 19, No.

1,2007

OWNERSHIP STRUCTURE, CORPORATE GOVERNANCE, AND

FIRM'S PERFORMANCE IN EMERGING MARKETS:
Evidence from Bangladesh

A. SaburMoIlah*
University of Botswana

Muhammad Bakhtear Uddin Talukdar

Daffodil International University, Bangladesh

Abstract

This study examines whether differences in ownership structure across firms can
explain their performance differences in an emerging economy, like Bangladesh,
where corporate governance variables have been tested whether they exert any
influence on firm performance. The empirical evidence of this study suggests that
sponsor and government holding are significantly positively related to firm
performance, whereas institutional holding is insignificantly related to performance.
However, board size and existence of audit committee chaired by sponsor director
are significantly negatively related to firm's performance. Using the data for the
period of 2002-2004, it is observed that a large fraction of cross-sectional variation
in performance, found in several studies, is explained by unobserved firm
heterogeneity, rather than the shareholders holding pattem alone.

/. Introduction:

Corporate failure, scandal, and stock market crashes across the

world in the early 2000 have shaken the confidence of the investors around
the world. Practitioners, investors, regulators, and researchers wonder about
this severe fallout and have raised the puzzling question: what went wrong?
This troubled corporate woHd signals to all interested parties that corporate
governance needs to be scrutinized. Are the corporations properly governed
so that control of the corporation is not centralized in the hands of
management? Are shareholders and other stakeholders taking part in the
corporate governance so that corporate practice remains unbiased, efficient,
and goal driven? Is corporate governance sufficiently decentralized and or
distributed among different stakeholders so that management is monitored
and controlled properly? There are several studies conducted in this arena in
developed economies where, the studies focus on either the relationship
between ownership structure and performance or the relationship between
corporate governance and performance. This study examines whether
differences in ownership structure across firms can explain their
performance differences in an emerging economy like Bangladesh, where
corporate governance variables have been tested whether they exert any
infiuence on firm performance. Specifically, if some of the unobserved
determinants (both corporate governance 'CG' and other control variables)

Electronic copy available at: http://ssrn.com/abstract=2385805

 4316 The International Journal of Finance

of firm performance are also determinants of ownership stmcture, then

ownership structure might spuriously appear to be a determinant of firm
performance. We attempt to resolve some interesting questions: Does
ownership matter? If it does, is government ownership more effective than
private (including foreign) ownership in maximizing firm value? Can
ownership be a method in controlling agency cost? These questions are
explored to attain the major objective of this study which is to examine the
relationship between ownership structure and firm performance, where
corporate govemance variables have been shown as control variables and
their influence on performance is also justified. In this quest, we investigate
the relationship among ownership structure, corporate govemance variables,
and firm performance.
Despite a vast majority of the literature has engaged in the area of
corporate govemance, ownership stmcture, and firm performance in the
developed economies, there is none in Bangladesh on these issues. The
major objectives of this study are to investigate the relationship between
ownership structure and firm's performance, and to determine the role of
corporate governance in the performance behavior of companies listed in an
emerging market like Dhaka Stock Exchange. The approach of this study
vastly varies from available literature; therefore, the empirical evidence will
undoubtedly contribute to the existing literature of corporate govemance
issues. The empirical evidence of our study suggests that the ownership
structure do change significantly over time in emerging economies like
Bangladesh. Our study also documents that institutional shareholders
including the government and in some cases directors are the group of
owners, which confirms Berle and Means hypothesis after controlling for
firm specific fixed effects and some observed firm-specific factors that may
influence firm's economic performance.
The remainder of the paper is organized as follows: section II
discusses corporate ownership pattems that lead to corporate govemance;
and extant literatures related to corporate governance and ownership
structures; data and model of this study described in section III, section IV
highlights the results of the empirical findings; and concluding remarks are
in section V.

//. Literature Review

Economists have been interested in the effects of the separation of

ownership and control in the modem corporation at least since the classical
works of Berle and Means (1932) and Coase (1937). This interest continues,
as evidenced by major studies in the last decade (Cosh and Hughes, 1987;
Jensen and Murphy, 1990). The major focus of concem has been the
potential conflicts of interest between managers and shareholders. One
method suggested to reduce this potential conflict is to increase the identity
between the two groups, typically through inducing managers to own shares
in the company. Financial literature on this issue have shown that
managerial ownership of shares in a firm generates two conflicting forces on
management behavior, namely the convergence of interest effect and the

Electronic copy available at: http://ssrn.com/abstract=2385805

Ownership Structure, Corporate Governance 4317

entrenchment effect (Jensen and Meckling, 1976; Fama and Jensen, 1983;
Hart, 1983; and Jensen and Ruback, 1983). Previously, it is observed that
the relationship between managerial stake and market value of the firm is
positive, as management and shareholder interests converge. But the recent
literatures show a negative relationship, as a larger managerial stake
entrenches and insulates management from the market for coiporate control.
A number of studies have sought to evaluate empirically the link
between managerial share ownership and firm performance. The empirical
results are not unanimous e.g., Demsetz (1983) argues that there should be
no relationship between ownership structure and firm performance. Pursuing
this argument empirically, Demsetz and Lehn (1985) fail to reveal anything
likely from their study. However, Tsetsekos and DeFusco (1990) construct
portfolios arranged according to managerial share ownership and report no
significant differences in the returns on the various portfolios. In contrast,
Mehran (1995) provides evidence of a positive relationship between
managerial equity ownership and firm performance. Similariy, Wruck
(1988) finds a strong and, on average, positive link between the change in
ownership concentration and firm performance. Controlling a number of
well-known determinants of stock returns, Nandelstadh and Rosenberg
(2003) find evidence that firms categorized by inefficient corporate
governance have delivered inferior returns to shareholders in one hand and
firms characterized by efficient corporate governance have been valued
higher in the other hand.
Bede and Means (1932) indicates that with an increase in
professionalization of management, firms might be operating for the
managers' benefit rather than that of the owners. The principal-agent
framework is used by Jensen and Meckling (1976), to explain the confiict of
interests between managers and shareholders. The agency problem,
developed by Coase (1937), Jensen and Meckling (1976) and Fama and
Jensen (1983) is an essential part of the contractual view of the firm.
Researchers investigate the efficacy of alternative mechanisms in terms of
the relationship between takeovers, performance, managerial pay structure
and performance of the firm. A handful of literature has attempted to test
directly Berie and Means hypothesis but the empirical evidence on this issue
is controversial. Using US data from early 1930s, Stigler and Fridland
(1983) found no evidence in favor of Berie and Means hypothesis, whereas
McConnell and Servaes (1990), Mork, Shleifer, and Vishny (1988) provide
evidence in favor of significant effect of managerial and institutional
shareholding on performance.
Researchers widely believe that an efficient market for corporate
control contributes to sound corporate governance. Since, poor management
can be replaced in the result of takeover; managers definitely have
incentives to improve firm performance to retain their power (Auerbach
(1988)). However, a transparent developed stock market provides clear
signals of management quality enhancing corporate governance (Levy
(1983), Shleifer and Vishny (1997)). And legislative enforcement of
contract and property rights is among the most Important conditions for
efficient corporate governance (La Porta et al. (1997, 1998)).
4318 The International Journal of Finance

The corporate govemance varies according to the ownership

structure of the corporate sector. At one end of the spectmm there are
companies in which ownership is dispersed among small shareholders,
while control is concentrated in the hands of managers (Berle and Means
(1932)). The dispersed shareholding is observed in countries with "common
law" legal system - USA, UK (La Porta et al. (1999)). There, the Anglo-
Saxon corporate govemance system relies on sophisticated legal protection
of investors from appropriation by managers. Generally, voting on important
intemal (election of the board of directors) and extemal (mergers and
liquidations) corporate matters is the main means of control (Easterbrook
and Fischel (1983)). Hence, the enforcement of voting rights is the key issue
of the Anglo-Saxon corporate govemance system. At the other end of the
spectrum there are companies with concentrated ownership of large
investors (Shleifer and Vishny (1986)).In such companies, managers act at
the dictate of the controlling shareholder or debtor. The concentrated
ownership is common for countries where it is quite costly for small
investors to exercise their control and cash flow rights. Large investors
enjoy economies of scale and reduced traditional free rider problem. The
Continental Europe and Japan experience corfwrate govemance conducted
by large investors (La Porta et al. (1999)). The empirical evidence suggests
positive relation between the concentration and corporate performance.
Thus, Gorton and Schmid (1996) find for German corporations that block
holders improve company performance. In Japanese corporations large
shareholders replace badly performed managers more often than dispersed
ones (Kaplan and Minton (1994)).
While theoretical analysis of corporate govemance deliver
counteracting mechanisms of control, the empirical literature sheds light on
the role of these counteracting mechanisms, suggesting firm value is an
outcome of these mechanisms. As large shareholdings are common in the
world, except the US and the UK (La Porta et al. 1999), it is argued that
large share-holders' incentive to collect information and to monitor
management reduces agency costs (Shleifer and Vishny 1986). Most of the
works in literature have evolved against the backdrop of capitalist
economies, while there is very little known (empirically) about such issues
in emerging market economies.
If complete contracts could be written and enforced, ownership
structure should not be a matter of concern (Coase 1960, Hart 1983). In
general, public sector firms are argued to be less efficient than private sector
firms (in relatively competitive markets) due to low-powered managerial
incentives and interest alignment. There could be "political" reasons, as
govemment pursues multiple objectives, some of which, unlike profit
maximization, are hard to be contracted upon. Share holding pattem in such
cases can make a difference in terms of firms' performance. Sarkar and
Sarkar (1999 and 2000), using firm level balance sheet data for 1995-96,
provide evidence on the role of large shareholders in monitoring company
value. They find that blockholdings by directors increases company value
after a certain level of holdings. However, they do not obtain any evidence
of active governance from institutional investors. They also highlight that
foreign equity ownership has a beneficial effect on company value. By
Ownership Structure, Corporate Governance 4319

adopting a spline methodology, they documented that for each type of large
shareholder, the incentives for monitoring, changes significantly when
ownership stakes rise beyond a particular threshold.
Most empirical studies in corporate governance try to analyze how
corporate governance infiuences firm performance by observing Ownership
pattem (Ownership concentration, directors'/sponsors' ownership, type of
ownership). Board structure (Board size, board independence, executive
compensation, board committees, CEQ duality (CEO acting as a chairman
of the board), and Board activity (Board processes, frequency of board
meetings, board meeting time and attendance). Literature on ownership
pattem and firm performance considers fi-agmentation or concentration of
ownership or, in other words, presence of block equity holders (Shleifer &
Vishney, (1986), Hansen, (2005), Gugler (2001)).
Welch (2003) examines the relationship between ownership
structure and firm performance in Australian firms using Demsetz and
Villalonga's (2001) model and their empirical evidence cleariy support that
firm performance is statistically dependent on managerial ownership.
Dwivedi & Jain (2002) investigate the relationship in the Indian context.
Their analysis of the Indian corporate sector provides evidence that a higher
proportion of foreign shareholding is associated with increase in market
value of the firm, while the Indian institutional shareholders' association is
not statistically significant. A weak positive association is also found
between board size and firm value. Directors' shareholding has a non-linear
negative relationship with firm value while the public shareholding has a
linear negative association. However, endogeneity in the variables was not
well recognized. Kumar (2002) examines whether differences in ownership
structure across firms can explain their performance differences in an
emerging economy Hke India. Kumar (2002) concludes that the foreign
shareholding pattem does not infiuence the firm performance significantly.
This result is in sharp contrast with other existing studies with respect to
India and other developing countries, which find that foreign ownership,
lead to higher performance. Black, Jang, and Kim (2003) report evidence
that corporate govemance is an important factor in explaining the market
value of Korean public companies. Shaheen and Nishat (2005) also relate
corporate govemance to firm performance and suggest that firms with
relatively poor govemance are less profitable, less valuable, and pay out less
cash to their shareholders.

///. Methodology

To address the major objectives of this study, we used both primary

and secondary data from 55 listed companies of the Dhaka Stock Exchange
(DSE) in Bangladesh. A survey was conducted considering the govemance
practices of the firms listed in DSE in the period of January 2005, where the
questionnaire was structured containing the broad captions like general
information, issues related to board meeting, audit committee, execiitive
committee, and managing director/chief executive officer of the companies.
4320 The International Journal of Finance

However, the performance and govemance related data were collected from
published materials of DSE for the period of 2002-2004.
Using the detailed ownership structure of the listed firms in DSE,
we tried to answer some of the more commonly raised questions by the
researchers in the recent corporate finance herewith. Does ownership
matter? If it does, then, whether govemment ownership is more effective
than private (including foreign) ownership in maximizing firm value? Can
ownership be a tool to control agency cost?

Hypotheses:

Hoh There is no relationship between ownership structure andfirm'sperformance

H02: Corporate governance has no role toptay over thefirm'sperformance

In this context, we investigated the influence of ownership

stmcture, corporate govemance variables on the firm performance using
OLS regression method.
The OLS model looks like the following:

Performance!, = or + /^(ownership) ^ + yX^ + AZ, +

where

Performance^, = Performance of the i* firm at time period t,

Xi - Firm's specific variable of the i"" finn,
Z, = Corporate Govemance Variables of i"" firm, and
Sji = Error term

We regressed the above model into two stages (2SLS): at first

stage, we take ownership variables and some firm specific variables, and at
second stage, we add some corporate govemance variables to the original
model.
Firm's performance is considered as the dependent variable in this
study. Retum on assets (ROA), retum on equity (ROE), and natural log of
market capitalization (LnMktcap) are the proxies of the dependent variable.
A set of firm specific and corporate govemance variables incorporates in the
model. However, we used industry dummy as an independent variable to
capture the unobserved firm's heterogeneity across the industries.
We regressed ROA, ROE, and LnMktCap as performance indicator
against Sponsor Holdings, Government Holdings, Institutional Holdings,
Public Holdings, Beta of the firm. Size of the firm, and Industry
Dummy. So our Model 1 looks like the following:
Ownership Structure, Corporate Governance 4321

Model 1
\

ROA, =a +fi.SPONSOR-^-pfiOVT^ PJNSTIN + y.BETA + Y ^^

Y^INDDVMY-V

ROE, = a + P.SPONSOR + PfiOVT + PJNSTIN +;', BETA + y.SIZE + (Ji)

y,lNDDUMY + e^
LnMklCap, =a + P.SPONSOR^ PfiOVT + pJNSTIN +r,BETA + y,SIZE-\- (iii)

Ownership variables include sponsor holdings, government -

holding, institution holding, foreign holding and public holding. Due to its
meager presence, foreign holdings (no observation is over 50%
concentration; only IDLC had 45% concentration; mean value 2.59%) are
excluded from ownership. We have included sponsor shareholder
(SPONSOR), govemment holdings (GOVT), institutional holdings
(INSTIN) and general public (PUBLIC) as ownership variable. SPONSOR
and PUBLIC are expected to inversely related to each other in terms of
performance, i.e., the firm with more concentration in SPONSOR and less
in PUBLIC has weaker performance and vice versa. GOVT ownership
concentration is expected to inversely relate to the performance. In general,
public sector firms are argued to be less efficient than private sector firms
(in relatively competitive markets) due to low-powered managerial
incentives and interest alignment. There could be "political" reasons, as
govemment pursues multiple objectives, some of which, unlike profit
maximization, are hard to be contracted upon (Kumar, 2002). INSTIN
ownership concentration is expected to be positively related with firm
performance.
As the firm specific variables, we have included BETA (computed
as co-variance of j * company's retum with market return at time period 't'
divided by the variance of market return, company's retum includes both
capital gain as well as dividend) as the risk component in the model.
However, we also used natural logarithm of assets to control firm size
whereas Loderer and Martin (1997) and Kumar (2002) used ln(sales)
whereas Craswell, Taylor and Saywell (1997) used Ln (Book Value of
Assets) as a proxy of firm size variable in their study. The relationship
between firm size and firm performance is ambiguous. Larger firms can be
less efficient than smaller ones because of the loss of control by top
managers over strategic and operational activities within the firm. Large
firms may turn out to be more efficient as they are likely to exploit
economies of scale, employ more skilled managers and the formalization of
procedures that may lead to better performance. It also measures a firm's
market power or the level of concentration in the industries in which the
firm operates. Such characteristics make the implementation of operations
more effective, allowing large firms to generate greater retums on assets and
4322 The International Journal of Finance

sales as well as to capture more value as a proportion of the value of the

production, leading to a higher firm performance.
In order to measure the influence of good govemance practices on
firm's performance, we extended our model by adding corporate govemance
variables like board size, and chairing authority of audit committee and
executive committee. Number of directors, BORDSIZE, put here as
corporate govemance variable. There is mixed evidence in the empirical
literature linking board size to corporate performance. One group of
researchers predicts board size to have a positive association with firm
performance (Dalton et al, 1999; Pearce & Zahra, 1992); another group has
shown a negative relationship (Yermack 1996; Eisenber et al, 1998;
Hermalin & Weisbach, 2001) while yet another group has arrived at a non-
linear or an inverted 'U' shaped relationship (Vafeas, 1999; Goilden &
Zajack, 2001). Bigger boards are expected to have representation of people
with diverse backgrounds and thus expected to bring knowledge, wider
perspective and intellect to the board. Board size is also associated with
presence of more outsiders, who foster more careful decision-making policy
in finns. This is because the reputation cost for outside directors in case of a
firm's failure is likely to be high; however, their reputation is not enhanced
by an equal measure with the firm's success. On the flip side larger groups
also suffer from a problem of diffusion of responsibility or ^social loafing',
wherein individuals discount the likelihood that others will detect their poor
contributions.
Presence of audit committee where non-sjwnsor director chairs the
committee ensures proper disclosure and greater accuracy of financial
statements and is expected to positively relate with corporate performance.
If sponsor director or director finance acting as chairman in audit
committee, then they may pursue to hide their improper actions and may
hide some material information to investors. In our case most of the firms do
have audit committee (particularly nature code 1) but sponsor director or
other insiders as Chairman of the committee.
Now if we elaborate the model 1 with the three corporate
govemance variables (viz. BORDSIZE, CHAR_AC, CHAR_EC) stated
above, then model 2 will be look like following:

Model 2

a + fi.SPONSOR + pfiOVT+fi,INSTIN+y^ BETA + y.,SlZE +

yJNDDUMY + X^BORDSIZE+X^CHAR _ AC + X,CHAR_EC + E,,

ROE, = a + p^SPONSOR + fifiOVT + fi,INSTlN + y^BETA + y^SIZE +

yJNDDUMY + X^BORDSIZE + X^CHAR _AC + X^CHAR _EC + e,,

LnMktCap, = a + P,SPONSOR+PfiOVT + fi.INSTIN + y^BETA + Yi (vi)

SIZE + r^INDDUMY + X^BORDSIZE+X^CHAR_ AC + X^CHAR _EC + e,,
Ownership Structure, Corporate Governance 4323

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4324 The InternationalJoumal of Finance

IV. Data Analysis and Empirical Evidence

This section summarizes the estimation and findings using the

model developed in the previous section. This section interprets the
descriptive statistics of variables used in the study which comprises
maximum, minimum, mean and standard deviation of the variables. Then
we provide regression results of model 1 where we use ROA, ROE and
LnMktCap as dependent variables and sponsor, govemment, institution,
public holdings, industry dummy, beta and size of the company as
independent variables. The average retum on assets is 2.48% and the return
on equity is 4.3% but the mean value of other firm performance parameter
(log of market capitalization) is 5.54. The standard deviations of the proxies
for firm performance are 6.46,4.03, and 2.11. Sponsor directors are holding
49.47% shares whereas the public share are only 36.61% and govemment
holds 26.25% shares of the listed companies, which indicate highly
concentrated and insider owners are influential in Dhaka Stock market. The
intensity of risk (BETA) is not too much in Dhaka market as because the
mean value is 0.62, varies between -1.02 to 2.18, and standard deviation is
only 0.64. The average board size is 12 having a range of 4-27 (table 2). As
we think that firm performance can not be fully explained by only
ownership variables and firm specific variables i.e. there are some important
corporate govemance variables that might affect firm's performance, we
expand our model by including some important corporate govemance
variables. The expanded model produces better results in explaining firm's
performance. Table 4 and Table 5 give the result of Model 1 and Model 2
respectively.

Tabte 2: Descriptive Statistics

Std.
N Minimum Maximum Mean Deviation
ROA 161.00 -3.29 7.70 2.48 ; 6.46
ROE 161.00 -2.08 6.88 4.30 . 4.03
LNMKTCAP 149.00 1.44 9.33 5.54 2.11
SPONSOR 124.00 4.25 99.85 49.47 19.94
GOVT 32.00 .64 95.01 26.25 35.93
iNSTIN 91.00 1.00 70.00 15.88 13.U
FOREIGN 19.00 .55 45.00 15.76 16.08
PUBLIC 139.00 1.00 94.94 36.6i 22.61
INDDUMY 161.00 0 1 .54 .50
BETA 161.00 -1.02 2.18 .62 .64
SIZE 161.00 .93 11.53 7.33 , 2.71
BORDSIZE 57.00 4.00 27.00 11.61 5.45
CHAR_AC 45.00 0 1 .47 .50
CHAR_BC 34.00 0 1 .44 .50
Ownership Structure, Corporate Governance 4325
 4326 The International Journal of Finance

Model 1: Table 4: Regression Result

MODEL 1 Dependent Variable ROA ROE LnMktCap

-5.72 -3.188 1.241"

(Constant)
(7.16) (30.453) (.674)
.15 .28 -.007
SPONSOR
(.07) (.28) (ooi],
.09 -.011
GOVT
(.08) (.085) (.008)
INDlEPENDE

.05 .001
INSTIN
(.09) (.045) (.009)
.17 -.014*
PUBLIC
(.07) (.170) (.007)
> 3.58 41.90* -.100
R IABLE

INDDUMY
(4.09) (41.90) (.385)
2.10 3.36 .532
BETA
(1.89) (3.36) (.181)
-1.10** -4.81** .066*
SIZE
(.68) (-4.81) (.066)

R .286 .328 .910

R Square .082 .108 .828

Adjusted R Square .028 .055 .818

F statistics 1.506 2.037 79.096

(Significance) .172 .056 .000

Value within the parenthesis indicates standard error, *= significant at 5% level; **-
significant at 10% level, ***= significant at 20% level.

70%. SPONSOR varies between 4.25% to 99.85% that indicates highest

concentration in company's equity, its mean value also the largest one
among all ownership variables with value of 49.47% (sponsor director), the
second largest group is PUBLIC that has mean of 36.61%, but due to severe
multicollinearity with SIZE and SPONSOR (52% and 50% respectively).
 Ownership Structure, Corporate Govemance 4327

70%. SPONSOR varies between 4.25% to 99.85% that indicates highest

concentration in company's equity, its mean value also the largest one
among all ownership variables with value of 49.47% (sponsor director), the
second largest group is PUBLIC that has mean of 36.61%, but due to severe
multicollinearity with SIZE and SPONSOR (52% and 50% respectively),
we deleted PUBLIC from our analysis. Industry dummy, chair of the audit
committee and chair of the executive committee (INDDUMY, CHAR AC,
and CHAR_EC respectively) are dummy variables here. Table 3 presents
the correlation among the variables.
70%. SPONSOR varies between 4.25% to 99.85% that indicates
highest concentration in company's equity, its mean value also the largest
one among all ownership variables with value of 49.47% (sponsor director),
the second largest group is PUBLIC that has mean of 36.61%, but due to
severe multicollinearity with SIZE and SPONSOR (52% and 50%
respectively), we deleted PUBLIC from our analysis. Industry dummy, chair
of the audit committee and chair of the executive committee (INDDUMY,
CHAR_AC, and CHAR_EC respectively) are dummy variables here. Table
3 presents the correlation among the variables.
we deleted PUBLIC from our analysis. Industry dummy, chair of the audit
committee and chair of the executive committee (INDDUMY, CHAR_AC,
and CHAR_EC respectively) are dummy variables here. Table 3 presents
the correlation among the variables.
Table 4 reports the results from multiple regression analysis that
duplicates our model 01 specified in the Section 4. From the regression
results we see that there is a weaker relationship between the dependent
variable ROA, ROE, LnMktCap and the independent variables. The
multiple correlation co-efficients are .27 for ROA, .33 for ROE, .91 for
LnMktCap in our result. The co-efficient of multiple determination for ROA
i.e. R square is 0.82 or 8.20% that means that the 8.20% variation of
dependent variable can be explained by the joint variation of independent
variables, but whenever the degrees of freedom has been adjusted the
overall model becomes least weaker (denoted by adjusted R square, i.e. only
2.08%). The overall model is statistically insignificant for both ROA and
ROE as it is significant at 17.20% and 5.60% respectively that is more than
5.00%. But the model is statistically significant when LnMktCap used as
dependent variable, as it is significant at 00% that is less than 5% .The
standard error of the estimate is 9.74 for ROA that indicates how far the
values on an average disperse from the best fitted regression line. In case of
ROA the co-efficient is positive for SPONSOR, GOVT, PUBLIC, INSTIN,
If BETA increases i.e. if market risk of the firm increases then its
performance is also enhanced, that is also supportive to risk-retum
proposition; high risk corresponds to high retum. Now we depict the result
of our second model.
BETA, INDDUMY that indicates that if sponsor holding increases
then firm performance is also better off that is true in case of Bangladeshi
 4328 The International Journal of Finance
Model 2: Table S: Regression Result
MODE Dependent ROE LnMktCap
ROA
L2 Variable
2.03 5.83 ' -.39
(Constant)
(3.67) (16.88) I (1.18)
.07* .14 , .02*
SPONSOR
(.03) (.12) ; (.01)
.21* .58* .03*
GOVT
(.05) (.23) (.02)
-.01 .05 ' .02**
INSTIN
(.17) ; (.01)
INDlLPENDE

(.04)
-5.45* -3.67 : -.97***
INDDUMY
(2.10) (9.64) ' (.67)
2.38 12.72*** ; 1.36**
Z BETA
H (2.08) (9.58) (.67)
< .23 .80*
.39
RIABLE

SIZE
(.42) (1.92) (.13)
-.16 -.27 ; -.11*
BORDSIZE
(.16) (.76) ; (.05)
-4.94* -12.07** -1.41*
CHAR_AC
(1.48) (6.80) (.47)
1.55*** 1.103 '' .87*
CHAR_EC
(1.22) (5.631) i (.39)

R .899 .666 i .860

R Square .443 i .740

.807

Adjusted R .179 i .617

.716
Square
F statistics 8.847 1.680 '' 6.003

(Significance) .000 .163 ^ .001

Value within the parenthesis indicates standard error, *= significance at 5% level;

**= significance at 10% level, ***= significance at 20% level.
Ownership Structure, Corporate Govemance 4329

firm, though contrary to empirical findings in developed economies. The co-

efficient is negative for SIZE that indicates if firm's asset base increases its
performance deteriorates that may be feasible due to weaker control and
monitoring of being the firm bigger. The public holding is positive with
performance that rejects the proposition by Berle and Means (1932); they
argued that ownership diffuseness undermines the shareholders' ability to
control the professional management of the firm.
Model 2 (Table 5) is statistically significant when ROA and
LnMktCap used as dependent variable as it is significant at 00% level which
is less than 5.00% and insignificant when ROE is used as dependent variable
as it significant at 16.30% which is more than 5.00%. The set of
independent variables also exert almost perfect positive correlation with the
dependent variable ROA and LnMktCap (denoted by multiple correlation
coefficients: 0.90 and .86 respectively). Where 81.70% of the variability of
dependent variable (ROA) can be explained by the joint variation of
independent variables (dictated by R square or co-efficient of multiple
determination). Even when the degrees of freedom has been adjusted the set
of independent variables are still stronger to explain the variability of
dependent variable; adjusted R square is 72%. Individually independent
variables like sponsor, govemment, industry dummy and chairman of the
audit committee (SPONSOR, GOVT, INDDUMY and CHAR_AC
respectively) are statistically significant at 5.00% level. SPONSOR, GOVT
have positive relationship with the ROA as they have positive beta or
coefficients. Whereas INDDUMY, INSTIN have negative co-efficient that
indicates if the particular company be chosen from 'Banks' then its
performance will be weaker than the company chosen from other industry
(in our analysis 'Food and Allied'). The co-efficient is negative for INSTIN
that may be contrary to empirical findings as institution as a block share
holders can control the discretionary behavior of greedy management. But is
can be negative in our sample of nature code 1 and 7 due to meager
institutional holding i.e. the mean institutional holding is 9.51%. Co-
efficient of BETA remains positive in model 2 as in model 1, but it has
increased slightly than that of previous in model 1 where ROA used as
dependent variable. Co-efficient of SIZE (denoted by the natural logarithm
of total assets of the firm) has reversed in model 2; it has changed to positive
sign that indicates if the firm grows its assets base its performance also
enhanced. Board size has negative co-efficient in all cases that indicates
large Board creates chaotic situation to finalize the economic decision
unanimously. The larger the Board size, the weaker the performance. The
larger Board suffers from a problem of diffusion of responsibility or 'social
loafing', wherein individuals discount the likelihood that others will detect
their poor contributions.
The variable CHAR_AC (chairman of the audit committee; put 1
for sponsor director and 0 for otherwise) and CHAR EC (chairman of the
executive committee; put 1 for sponsor director and 0 for otherwise) have
negative and positive co-efficient respectively in all three cases. If the audit
committee has been chaired by the sponsor director then the firm
performance will be lower and if chaired by outsiders (non sponsor director)
then its performance will be improved. On the other hand if executive
4330 The International Journal of Finance

committee is chaired by sponsor director its performance will be improved

as it has positive co-efficient of 1.55,1.10,0.87 respectively that indicates if
executive committee has been chaired by the sponsor director ROA, ROE
and LnMktCap will be increased by 1.55%, 1.10% and .87% respectively.
Here most infiuential independent variable for performance is GOVT. when
ROA and ROE used as dependent variables and BETA when LnMktCap
used as a dependent variable as they have highest unstandardized coefficient
or beta.
Though the overall model produces good result, there exists severe
multicollinearity among the independent variables i.e. correlation between
INDDUMY and BETA is 0.45 and correlation between INDDUMY and
SIZE is 0.65, BETA with BORDSIZE has correlation of 0.79 to mention the
few. This requires using two stage least square (2SLS) regression and
creating instrumental variable to separate the influence among or between
the independent variables. So this will require further analysis.

V. Conclusion:

This study examined the relationship between the ownership

structure, firm specific variables, corporate govemance variables and firm
performance using data of listed companies from 2002-2004 from Dhaka
Stock Exchange. We observe that unobserved firm heterogeneity explains a
large fraction of cross-sectional variation in shareholding pattem that exists
in the Bangladeshi firms. We conclude that sponsor and govemment holding
are positively associated with the firm performance that means the firms
with more ownership concentration in sponsor category will have good
performance than their peers. This is evidenced by the good performance of
some national firm in recent years, where ownership concentration in
sponsor is more. But this is somewhat weird that govemment concentration
will improve the firm performance. We deleted Public ownership from our
analysis due to its high multicollinearity with the other independent
variables particularly with sponsor and size of the firm (natural logarithni of
asset base). Sponsor remains significant in all our model 1 and model 2; it is
due to the fact that Bangladeshi firms are family dominated. Existence of
audit committee and executive committee ensures improved performance in
firms other than banks, where the committees chaired by sponsor director.
But in case of Banks existence of audit committee chaired by sponsor
director will dampen performance. A useful extension of this analysis would
be to include additional policy variables measuring changes in the market
conditions such as trade or tax policy changes, to see whether ownership
structure changes dramatically or not, if so to what extent and why? Do
companies in emerging markets actually raise substantial equity finance?
Who are the buyers of this equity? If they are dispersed minority
shareholder, why are they buying equity despite the apparent absence of
minority protections? Finally, these research questions remains for further
study on tiie issue of corporate govemance.
 Ownership Structure, Corporate Governance 4331

Endnote

* For correspondence contact A. Sabur MoUah, Senior Lecturer in Finance, Dept of

Accounting & Finance, University of Botswana, Private Bag UB00701, Gaborone,
Botswana. Tel: +267 355 2236 (Work), Fax: +267 3185102 (Work), E-mail:
m<)llalias(</'inoi)ini.ub.bw: saburOl 12@yahoo.co.uk.

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