Tony van Zijl

Corporate Governance in Bangladesh: Link between Ownership and Financial Performance

This paper investigates empirically the effect of board ownership on firm performance in Bangladesh. By estimating single equation and simultaneous equation models on an unbalanced pooled sample of listed firms, it offers some new insight into the ownership-performance link in Bangladesh. Building on extant literature, it examines the ownership-performance relationship in an emerging market economy considering ownership as exogenous and as endogenous. The latter approach is favoured as recent empirical evidence shows that ownership and performance are endogenously determined and there is either a reverse-way or two-way causality relationship between the two. While OLS regression analysis indicates a linear and non-linear relationship between board ownership and performance, this disappears when 2-SLS estimation of a simultaneous equation model is carried out. Instead, a reverse causality relationship emerges. Other governance and control variables appear to have effects consistent with the literature. These results suggest a need to strengthen the internal control mechanisms within listed firms in Bangladesh. Copyright (c) 2007 The Authors; Journal compilation (c) 2007 Blackwell Publishing Ltd.

Earnings Quality and the Adoption of IFRS-Based Accounting Standards: Evidence from an Emerging Market

Purpose - This study aims to investigate the differences in earnings quality of Malaysian companies after the adoption of IFRS-based accounting standards named FRS. Design/methodology/approach - It is hypothesize that under the new set of accounting standards, the quality of earnings reported by these companies is relatively higher. Specifically, the study tests whether the level of earnings management is significantly lower after the adoption of IFRS, and reported earnings is more value relevant during the IFRS period. This study uses a large sample of 4,010 observations over a three-year period before and a three-year period after the adoption of the new set of accounting standards. Findings - The results show that IFRS adoption is associated with higher quality of reported earnings. It is found that earnings reported during the period after the adoption of IFRS is associated with lower earnings management and higher value relevant. Originality/value - The results of this study contribute additional evidence to the literature on earnings quality and the impact of IFRS adoption. As most of the existing studies on earnings quality and IFRS have been conducted on data from the U.S and European countries, this study fills a gap in the existing literature by studying the effect of adoption of IFRS on earnings quality in an emerging market.

Ownership Structure and Corporate Performance: Evidence from Bangladesh

This paper models the corporate ownership and performance relationship in Bangladesh listed firms using a simultaneous equations approach. Consistent with contemporary literature a “reverse-way” causality relationship between the two is documented. Using an unbalanced pooled sample of 660 firm-years, our results suggest that ownership does not have a significant impact on performance (Tobins Q or ROA). However, performance does appear to have a significant negative impact on ownership. With few exceptions, other governance and control variables appear to have significant effects on both performance and ownership. These results imply that despite significant governance differences between Bangladesh and developed market economies there are strong similarities in “internal governance mechanisms” and the implications of agency theory.

Deprival value and fair value: a reinterpretation and a reconciliation

Abstract Measurement is an important current issue for financial accounting standard-setters. Current values are increasingly replacing historical cost measures, but an important unresolved issue is the precise form that current value should take. In this paper two alternative measurement bases that have appeared in accounting standards. Deprivai Value (sometimes called Value to the Business) and Fair Value, are explained and compared. They are then reconciled by making the following three adjustments to their conventional definitions. (1) In the case of Deprival Value, situations in which net realisable value exceeds replacement cost imply that there is a profitable redevelopment or redeployment opportunity, so that net realisable value is regarded as the appropriate measure of Deprivai Value. (2) In the case of Fair Value, transactions costs (including installation and removal costs) are added to acquisition values and deducted from disposal values. (3) In the case of Fair Value, it is assumed that net realisable value represents the ‘highest and best use’, except when it is exceeded by both replacement cost and value in use. In the latter case, ‘highest and best use’ (and therefore Fair Value) is inferred by assuming profit-maximising behaviour by the owner. It is suggested that the resulting synthesis represents a method of current valuation which is consistent with the objective of measuring the asset in terms of the economic opportunities that are available to its current owner in the condition and location in which it is currently to be found.

Performance Measures and Short-Termism: An Exploratory Study

Abstract We examine the relationship between performance measurement systems and short‐termism. Hypotheses are tested on a sample of senior managers drawn from a major telecommunications company to determine the extent to which the diagnostic and interactive uses of financial and non‐financial measures give rise to short‐termism. We find no evidence to suggest that the use of financial measures, either diagnostically or interactively, leads to short‐term behaviour. In contrast, we find a significant association between the use of non‐financial measures and short‐termism. Results suggest that the diagnostic use of non‐financial measures leads managers to make inter‐temporal trade‐off choices that prioritise the short term to the detriment of the long term, while we find interactive use is negatively associated with short‐termism. We find an imbalance in favour of the diagnostic use over the interactive use of non‐financial performance measures is associated with short‐termism. Overall, findings highlight the importance of considering the specific use of performance measures in determining the causes of short‐termism.

International Financial Reporting Standards and New Zealand: Loss of Sector Neutrality☆

This paper describes the background to and implementation of the decision to adopt IFRS in New Zealand with particular focus on the issue of sector neutrality in financial reporting standards. New Zealands financial reporting standards were originally developed for application only by profit oriented entities. However, the major public sector management reforms of the 1980s led to increasing calls for financial reporting standards for public sector entities. Separate standards for the public sector were launched in 1987 but this path was abandoned in 1993 in favour of standards that would be applicable to all entities - sector neutral standards. The decision to adopt IFRS was made in the expectation that sector neutrality could be maintained by developing NZ IFRS that would contain additional requirements on recognition and measurement to cover public sector reporting issues but do so without introducing conflicts with the original IFRS. However, it was discovered that compliance with such NZ IFRS would not allow profit oriented entities to claim compliance with IFRS. It was therefore necessary to specify that the additional requirements in NZ IFRS apply only to public sector entities and thus - in effect - bring to an end sector neutrality in financial reporting standards in New Zealand.

Capital gains tax and the capital asset pricing model

This paper develops a version of the Capital Asset Pricing Model that views dividend imputation as affecting company tax and assumes differential taxation of capital gains and ordinary income. These taxation issues aside, the model otherwise rests on the standard assumptions including full segmentation of national capital markets. It also treats dividend policy as exogenously determined. Estimates of the cost of equity based on this model are then compared with estimates based on the version of the CAPM typically applied in Australia, which differs only in assuming equality of the tax rates on capital gains and ordinary income. The differences between the estimates can be material. In particular, with a high dividend yield, allowance for differential taxation can result in an increase of two to three percentage points in the estimated cost of equity. The overall result obtained here carries over to a dividend equilibrium, in which firms choose a dividend policy that is optimal relative to the assumed tax structure.

Impact of board ownership, CEO-Chair duality and foreign equity participation on auditor quality choice of IPO companies: Evidence from an emerging market

Purpose - The purpose of this paper is to examine the impact of corporate governance on auditor quality choice by IPO companies in an emerging market setting. It seeks to identify whether efficiency or opportunism is the driving force behind the choice of auditors in Bangladeshi firms going public. We try to see whether ownership concentration in the hands of a owner-CEO wins over foreign shareholders in the contest of ensuring financial reporting quality. Design/methodology/approach - Multivariate analysis has been carried out on all IPOs made during 1990 to 2005 whose financial statements were available. Logistic regression tool has been used to identify clients corporate governance attributes affect their choice of auditors. In total, three corporate governance attributes – CEO-Chair duality, retained ownership, and foreign equity participation – were used to test the impact of ownership structure on auditor choice. Findings - Our findings from logistic regression suggest that CEO-Chair duality and the degree of foreign equity participation are significant determinants of auditor choice while proportion of board ownership is not. In addition, issuer size and whether the issuer is a green field operation also influence auditor choice while the length of a firms operating history does not seem to matter. The findings support agency theory prediction that (at least one category of) principals (foreign shareholders in this case), are likely to trade-off higher monitoring costs (of hiring a higher quality auditor) with agency costs arising from asymmetric information, primarily borne by absentee owners. Originality/value - The work is based on empirical data directly from company financial statements. It uses audited financial statements and makes objective analysis of auditor choice dynamics in a frontier market that demonstrated significant growth of IPO activity in recent years.

Rights offerings, subscription period, shareholder takeup and liquidity

We examine the role of shareholder takeup in rights offerings on the subscription period price reaction and liquidity. Our results indicate that takeup information is reflected in price adjustments over the subscription period and that quality-related information disclosed on the rights announcement date further impacts prices in this period. Higher shareholder takeup improves liquidity. We do find some evidence of inefficiencies in the adjustment process over the subscription period that, in part, is consistent with a model where markets are characterized by overconfident investors and that also articulates with takeup information arriving in the market.

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

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 shareholders 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.