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Co-deterministic relationship between ownership concentration and corporate performance: Evidence from an emerging economy

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  • Omar Al Farooque
  • Tony van Zijl
  • Keitha Dunstan
  • Akm Waresul Karim
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    Abstract

    Purpose – 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. 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 firms listed on the Dhaka Stock Exchange over a seven-year period. The two equations model consists of firm performance and ownership concentration as endogenous variables along with other governance variable. Findings – The results suggest a significant positive co-deterministic relationship between ownership concentration and firm performance indicating that ownership concentration and firm performance simultaneously impact each other. It suggests that the ownership restriction imposed by the Securities and Exchange Commission is unjustified and detrimental to firm 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 aim should 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 first 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.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Accounting Research Journal.

    Volume (Year): 23 (2010)
    Issue (Month): 2 (September)
    Pages: 172-189

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    Handle: RePEc:eme:arjpps:v:23:y:2010:i:2:p:172-189

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    Related research

    Keywords: Bangladesh; Company performance; Corporate ownership; Emerging markets;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 26(2), pages 301-25, June.
    2. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, Elsevier, vol. 20(1-2), pages 293-315, January.
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    17. Anup Agrawal & Charles R. Knoeber, . "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 08-96, Wharton School Rodney L. White Center for Financial Research.
    18. Agrawal, Anup & Knoeber, Charles R., 1996. "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 31(03), pages 377-397, September.
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    20. Prevost, Andrew K. & Rao, Ramesh P. & Hossain, Mahmud, 2002. "Determinants of board composition in New Zealand: a simultaneous equations approach," Journal of Empirical Finance, Elsevier, Elsevier, vol. 9(4), pages 373-397, November.
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