Chapter 1: Introduction1. 1 Background of the StudyIn this era of digitization and technological advancements, profitability is one of the primary concern for any organization.
Factors affecting profitability are therefore the major factors to be considered in order to obtain expected profit from an organization. There are many factors/process that aids to measure and/or influence profitability and corporate governance is one core component. Ownership structure deals with corporate governance, as concentration of ownership determines control over decision making process related to the organization. Majority of the listed organizations in Bangladesh have five type of owners which includes: directorial ownership, government ownership, institutional ownership, foreign ownership and public ownership. This study deals with the effect ownership structure has on performance of an organization. It is conducted to determine whether ownership structure has significant correlation or impacts performance of an organization.
1. 2 Introduction to the StudyIn organizations, the impact of ownership structure on financial performance is very important. Shareholders are concerned regarding their profitability on investment and also monitoring managerial decisions that would impact their profit. This study focuses to analyze the impact of directorial ownership, government ownership, institutional ownership, foreign ownership and public ownership on financial performance of organizations in Bangladesh.
Ownership structure is very important as it mentions amount of control someone has over the business together with the liability of ownership and profit sharing. This makes it critical in context of organizations from 4 various industries to have been given the choice of ownership to be directorial, government, institutional, foreign or public (Boubakri et al., 2005). Ownership structure is vital for development of strong and healthy economic system, especially in emerging economies (Lang and So, 2002). Such importance is given to ownership structure because of its relationship with corporate governance and agency theory. As per the theories stated in Berle and Means (1932), ownership structure of shareholders and managers there is a greater chance of potential conflict of interest which affects financial performance of an organization.
It is suggested by Jensen and Meckling (1976) that managers acting as agents on behalf of an organization tends to follow strategies that meet their own personal goal rather than the one of the organization. Better management monitoring can be obtained from ownership concentration as it is a vital component of corporate governance. To compute an organization’s success, performance is the primary indicator and ownership concentration has a major impact on performance. As stated by Frich and Kohlar (1999) performance is conduct of activities for an organization over a period of time in part or in full with relation to its past or projected cost efficiency, responsibility or accountability of management. European Central Bank (2010), looks at financial performance of banks from the perspective of analyzing the main drivers of profitability; efficiency, earnings, leverage, and risk- taking.
The report goes on to note that the performance however needs to incorporate the views of different stakeholders which include debt, equity holders, depositors and managers.Strong positive relationship between ownership concentration and profitability is observed as per studies of Jensen and Meckling (1976), Mehran and Cole (1998), Lang and Djankov (2000), Mitton (2002); Iannota, Sironi and Nocera (2007) and Ongore (2011). On the other hand, studies of Lehn and Demsetz (1985), McConnell and Servaes (1990), Karathanasiss and Drakoes (2004) and Berger et al., (2005) state that concentration of ownership impacts negatively on organization performance.
Whereas, according to Ongore (2011), various type of shareholders have different perspectives and objectives. 1. 3 Problem StatementPrevious studies which were conducted on ownership structure and financial performance of an organization has resulted in various outcomes. Therefore, this area requires more study especially in developing countries where growth is vital for the economy to prosper. In Bangladesh, little literature is available on the latest data regarding ownership structure and financial performance of enlisted organizations. This study is expected to analyze the impact of ownership structure on financial performance of enlisted organizations in Bangladesh based on latest data available.
1. 4 Objectives of the StudyPrimary objectives:? To analyze the variables affecting profitability and ownership structure of organizations. ? To examine the effect of ownership structure on performance of listed organizations in Bangladesh.Secondary objectives: ? To understand the importance of the factors that influences performance of organizations.? To understand the significance of factors in ownership structure organizations.? To present relationship between variables of ownership structure and performance of organizations.
1. 5 Rationale of the StudyPerformance is one of the most important aspects for any organization which includes all the respective stakeholders. Various factors determine/influence performance and profitability is a major factor in this process. Investigation of the relationship between ownership structure and firm performance has been conducted in several studies across the globe. However, only a few studies have been found in Bangladesh specifically in this topic. This research would be helpful to analyze the ownership structure and its effect on performance of organizations in Bangladesh which could be compared to studies conducted in other regions of the world. 1. 6 Scope of the StudyThis study is based on data of last 5 years (2012-2016) including 99 organizations listed in Dhaka Stock Exchange at present.
99 organizations include 4 major industries including commercial banks, non-banking financial institutions, chemical ; pharmaceutical organizations and textile organizations. Specific variables such as Return on Asset (ROA) and Return on Equity (ROE) is considered to determine profitability. This paper is not intended to determine the subjective factors that could have affected profitability of organizations during the time period of collected data. Further scope of analysis exists with other variables of firms’ profitability.1.
7 Sources of DataTo collect data, only secondary sources have been used. Mainly annual report of the organizations have been collected from Dhaka Stock Exchange (DSE) and their websites. Some data have been collected also from various sources which includes company records, publications, previous researches etc. 1. 8 Limitations of the StudyThis paper is based on certain assumptions which might not be statistical estimates such as the variables affecting performance. Financial analysis required ample amount of time, patience, due procedure and most importantly sound knowledge. There could be violation in following right procedure in preparation of this study due to time and knowledge constraint.
There could be few more limitations like:? Enough information was not found, in order to make this a comprehensive study? This study is solely based on secondary data, there has been no use of primary data Chapter 2: Literature ReviewCorporate Governance term can be explained in various ways. According to World Bank, corporate governance represents “organization and rules that affect expectations about the exercise of control of resources in firms” (World Bank Development Report, 2002, p. 68). Other explanation states that “corporate governance issues arise in an organization whenever two conditions are present.
First, there is an agency problem, or conflict of interest, involving members of the organization – these might be owners, managers, workers or consumers. Second, transaction costs are such that this agency problem cannot be dealt with through a contract” (Hart, 1995, p. 678). Corporate governance interpretations have one thing in common that there is a requirement for handling systems and to limit conflicts. Berle and Means (1932) researched on the ownership from the perspective of management. The role played by management, minority versus majority shareholders in financial performance of an organization were also stated in the research.
They also argued that concentration of ownership is more prominent in developing countries. Researches including theoretical and empirical ones show relationship between ownership structure and firm performance was motivated by Berle and Means (1932) which identified separation of ownership and control. The research states an inverse correlation between concentration of shareholding and firm performance and also concludes that ownership structure affects firm performance.
After Berle and Means (1932), the positive relativity of ownership structure to firm profitability is argued widely. In addition to the debate, other researchers also researched on this topic and provided supporting evidences (Jensen & Meckling, 1976) mentioning the fact that separation among ownership and control provides managers with reduction risk facilities and managerial incentives. Amount of ownership owned by insider management and outsiders with no role in firm management is researched by Jenson and Meckling, (1976). The outcome stated that both a firm’s value and performance increase with the level of insider ownership.
Fama and Jensen (1983) argue that ownership concentration above a certain level will allow managers to become entrenched and expropriate the wealth of minority shareholders. This argument led scholars in a hot debate over the possible non-linear relation of ownership concentration and firm performance.Leech and Leahy (1991) researched the effect of separating ownership from control. Ownership structure was described using many measures of concentration and control. Thus, it was expected that ownership structure will affect firm’s performance through the effects of ownership concentration.
However, it a negative and significant relationship was found between concentration of ownership and firm value. Ownership concentration is the distribution of shares held by majority shareholders (Lee, 2008). In context of an organization, especially bank, concentration of ownership is very important element for growth and development specifically in the countries that are emerging. Identity of ownership can be categorized into foreign, domestic, public, private investors and institutional investors. However in case of banking, financial performance might be affected negatively due to concentrated ownership and increased operating costs.
Although, Ungureanu (2008) states that monitoring and control of all banking activities are improved with ownership structure for a better flow of information. On the other side, according to Berger et al., (2005) there is a negative impact of ownership concentration on performance. Financial distress and crisis tends to affect companies with high concentration more compared to others (Nora and Rejab, 2015).
Stated by Aydogan and Gursoy (2002) that government owned organizations bear higher risk which results in better financial performance. According to the study of Najid and Rehman (2015), it can be stated that ownership structure has strong positive correlation with financial performance of an organization. Sun and Tong (2003) states that foreign ownership did not have any significant impact on financial performance of organizations but government ownership showed negative effect on organization’s financial performance. Lee and Jun (2011) stated that ownership structure is the key factor of determining behavior of a firm, decision making, incentives and ultimately the performance. Ownership structure was determined as an internal mechanism of corporate governance. Although Demsetz and Villionga (2001) did not find any evidence of relationship between ownership structure and performance, Berger (2003) found substantial positive relationship between ownership and performance. On the other hand it was explained by Gupta (2005) that government owned organizations has negative effect on financial performance in India. Major aspect of ownership structure is associated with a company’s shares and concentration.
According to Citak (2007, p.231), a company’s owner ship is considered to be highly concentrated if a high percentage of shares is held by relatively fewer owners. Emerging economies has more ownership concentration as discussed by Khamis, Hamdan and Elali (2015). This can trigger potential conflicts between majority and minority shareholders which in result affecting firm performance. Chapter 3: Development of ResearchBusiness research involves establishing objectives and gathering relevant information to obtain answer to one or more issue(s).
Following in this study are the hypothesis developed which are relevant to the study. This chapter consists of a comprehensive discussion on overall research methodology including research philosophy, research approach, research design, research method, data collection mechanism, sampling framework relevant the research.