Corporate Governance and

Firm Valuation

Impact of Corporate Governance on Firms' Valuation –

A Study on the Commercial Banks of Bangladesh

Anamul Haque Rubayet Hasan

Assistant Professor Lecturer
Department of Banking & Insurance Department of Banking & Insurance
University of Chittagong University of Chittagong
anam.haq@cu.ac.bd

Abstract
Traditional corporate finance theory pronounces the implementation of corporate governance practices as an
instrumental issue for the firms’ value. In this regard, this paper aims at investigating the impact of internal corporate
governance practices on the firms’ value in a developing market setting where the regulatory arrangements
are week and fragile. It considers five commercial banks working in Bangladesh and their governance related
variables and other control variables collected as secondary data from 2013-2017. Different financial ratios and
statistical tools (descriptive statistics, Pearson’s correlation & regression analysis) have been utilized for verifying
the hypotheses. The findings reflect that CEO duality, board size, institutional directorship, age of the firm and
managerial shareholding have significant impacts on sampled banks’ net asset value (NAV). Finally, another
multivariate regression model has been reentered considering the only accepted variables.
Keywords: Corporate Governance, Net Asset Value, Commercial Banks.

Introduction
Understanding the influence of corporate governance on firm’s value has attracted the much interest of the
researchers in the field of finance and economics. This study has developed an interaction of corporate governance
in impacting firm’s value in the context of developing countries like Bangladesh where the regulatory arrangements
are week and fragile. In this regard, existing research like Berle and Means (1932) articulated the relevance of
corporate governance as an essential determinant between controlling insiders and exterior speculators, which
has vibrant suggestions for the valuation of the firm. The findings have consistency with the results of Jensen and
Meckling, 1976; Lemmon and Lins, 2003. Other studies (e.g., Morck, Shleifer, and Vishny, 1988; McConnell and
Servaes, 1990 and Holderness, Kroszner, and Sheehan; 1999 also provided similar empirical evidences in respect
of this hypothesis regarding the firm’s value. Besides, corporate governance has got much consideration due
to tall profile scandals such as Adelphia, Enron and WorldCom, serving as the impulse to the Sarbanes–Oxley Act

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of 2002, the foremost clearing corporate governance
regulation in the US within the final 70 a long
time (Byrnes et al., 2003). Consistent with this focus
on corporate governance, prior studies (e.g; Gompers
et al., 2003; Bebchuk and Cohen, 2005; Bebchuk et
al., 2005; Cremers and Nair, 2005) have originated
that better governance is connected to higher firm
valuation as proxied by Tobin’s Q. An interaction
between the ownership and governance literature has
been merged by Xu and Wang (1999) and suggested
the causation of large institutional investors in
influencing firm level corporate governance practices
and firm’s value adversely. Therefore, this research
aims at establishing a developing economy relevance
of corporate governance in impacting firm’s value.
This research has considered the interaction related to
corporate governance practices in the Banking industry
of Bangladesh for several reasons. The previous
literatures (e.g. Cho, 1998; Demsetz and Villalonga,
2001; Bøhren and Ødegaard, 2001; Barbosa and
Louri, 2002) directed for the purpose of examining
the effects of ownership structure is largely available
with greater attention to U.S. and European market.
While we have explored banking firms of Bangladesh
in order to afford new evidence. Based on theoretical
arguments our empirical model is specific to derive
the relationship between corporate governance and
firm’s value. Therefore, this study in origin contributed
to examine the impact of corporate governance on
firm’s value of banking industry which has immense
policy consideration.
The remainder of the study is organized as follows.
Section two reflects the existing literature, section
three aims and objectives, section four about
methodology, section five reflects analysis and findings
and section six provides the conclusion.
Literature Review
The nature of connection between the corporate
governance and firm performance and valuation have
been the center issue in the areas of corporate finance
literature. Al-Ahdal et al. (2020) defines corporate
governance in a mechanism that offers the
organizational structures through which firms
are directed and maintain a balance distribution
of resources among the competing parties like
shareholders, managers, investors, customers and
regulators. Researchers have therefore been exploring
the complex effect of corporate governance on the
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many facets of corporate decisions. Further, Kumar
(2004) and Barbosa and Louri (2002) observed that a
firms’ productivity consumed by its agents is significantly
influenced by ownership structure. In specific, corporate
governance is a motivation contraption for
diminishing the agency costs related with the
separation of ownership and firm’s value. This
research has in particular on the impact of corporate
governance within this scope on firm valuation and the
related literature.
Previously, Jensen and Meckling (1976) expressed that
corporate governance and its impact on firm’s value
is widely influenced by the firm specific ownership
structure in the sense of generally accepted corporate
finance literatures. There are six theoretical literatures
on corporate governance channels that could be
attributed to controlling agency costs (Kumar, 2004).
i.e. Ownership structure: Jensen and Meckling (1976)
and Shleifer and Vishny (1986), Capital Structure and
Board: Jensen (1986), Compensation: Jensnen and
Mourphy (1990), Competitive Risk: Hart (1983),
Takeover Market: Fama and Jensen (1983). Empirical
evidences suggest that firm value is an outcome of
these above counteracting mechanisms. Shleifer and
Vishny (1986) argued that institutional investors
enjoy the competitive advantage and incentive to
collect information and monitor management reduces
agency costs. These are evidences are quite available
in relation with developed countries but relatively
scare in developing countries like Bangladesh.
There have been found two conflicting body of
literatures regarding the impact of corporate
governance on firm valuation. Firstly, Farooque, et al
(2007) explained that ownership structure as a basis
for exercising power and control over corporate
entities can address problem of agency costs and
ensure efficient financial performance. They further
suggested to examine the ownership effect as one of
the core governance mechanisms along with others
such as, debt structure, board structure, incentive-
based compensation structure, dividend structure,
and external auditing on firm performance. However,
conducting a “reverse-way” causality relationship
between ownership and firm level performance on
the listed firms of Bangladesh, they documented
that ownership does not have a significant impact
on performance (Tobin’s Q or ROA) but theory
does appear to have a significant negative impact on
ownership. Findings also imply the significant relevance
of “internal governance mechanisms” on firm’s value.
To some extent earlier literatures (e.g. Loderer and
Martin, 1997; Cho, 1998; Demsetz and Villalonga,
2001) address endogeneity concerns about the
performance-ownership relationship in their analysis.
Loderer and Martin (1997) and Demsetz and Villalonga
(2001) found find no evidence that larger managerial
ownership boosts performance. In contrast,
performance appears to have a negative effect on
executive stockholdings. Cho (1998) confirms that
investment positively affects corporate value, which
in turn affects insider ownership. In addition, Bohren
and Odegaard (2001) based on Norwegian data,
Fernandez and Gomez (2002) based on Spanish firms,
Agrawal and Knoeber (1996), Firth et al. (2002) based
on U.S. firms and Himmelberg et al. (1999) found no
evidence of ownership structure influencing firm’s
value through the channel of corporate governance.
In recent literature, Ciftci et al. (2019) examined the
impact of corporate governance on firm performance
based on Turkey as an example of family capitalism
and concluded that more concentrated ownership
mainly family ownership directed to better firms’
performance. Varshney et al. (2012), Saini and
Singhania (2018) also found the similar conclusion
based on Indian firms. Iqbal et al. (2019) studied that
relationship for micro finance institutions working in
Asia based on seven measures about board size and
composition, CEO characteristics, and ownership
type and emphasized the endogenous nature of
corporate governance and financial performance.
Similar research done by Pillai and Al-malkawi (2017)
settled that government shareholdings, audit type,
size of the board, corporate social responsibility and
leverage significantly affect the firm performances in
the majority of the countries of the Gulf Cooperation
Council (GCC). Based on Chinese economy Shao
(2018) explored the relationship between corporate
governance structure and firm performance from
2001 to 2015 and found no relationship between
board size (including independent directors) and firm
performance and positive effects of concentrated
and state ownership. Surprisingly, Gupta and Sharma
(2014) found the limited impact of corporate
governance on financial performance based top 10
Indian & South Korean listed companies based on
turnover for the period from 2005–6 to 2012–13.
Secondly, Lubatkin and Chatterjee (1994) and Chen,
Guo, and Mande (2003) document that managerial
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shareholding has a linear significant impact on
Japanese firm performance, even after controlling for
firm fixed effects. However, they find that the fixed
effect is significant. Majumdar (1998) using industry
level survey data for 1973-89, compared performance
of state-owned enterprises, mixed-enterprises,
and private corporations and found that ownership
structure matters in firm valuation. Sarkar and Sarkar
(2000), Khanna and Palepu (2000), Patibandla (2002)
and Douma, George, and Kabir (2003) found that
governance practices through the channels of several
structures of ownership have positive effect on firm
performance. With respect to recent literature,
Brown and Caylor (2006) also found that governance
score is positively related with firm’s value measured
in Tobin’s Q in the U.S. economy. Aggarwal et al.
(2010) have considered the comparative impact
of governance between 22 foreign countries and
the U.S. with 1527 institutional observations and
supported that the governance gap is strongly related
to firm value. The flow of recent literature still shows
a competing view of corporate governance impact
on firm performance. Different researchers (e.g. Al-
Najjar, 2014; Arora & Bodhanwala, 2018) also posed
mixed evidences consistent with Brown and Caylor
(2006) regarding the corporate governance impact.
The above contrasting views of literatures around
the impact of corporate governance on firm
valuation prove the relevance the fact as a matter of
worthiness to be investigated. This research would
like to utilize the panel data of listed banking firms of
Bangladesh to examine the empirical specifications
of the relationship between corporate governance
and firms’ performance. In Bangladesh domestically
owned commercial banks have state, private and
mixed ownership. For the research simplicity we have
considered them just commercial banks.
Objectives
This research aims at exploring the impact of
corporate governance on firm valuation. Studies show
(Heugens, Van Essen and van Oosterhout, 2009)
that ownership concentration represents the optimal
corporate governance arrangement in contexts
such where institutions are relatively weak. Further,
cross ownership allows minority shareholders to
maintain control, whilst only holding a relatively
small proportion of equity (Bebchuk, Kraakman and
Triantis, 2000). Therefore, the below mentioned key
research question identifies the broad area of my research aim and supplementary questions outline the specific
intended research findings.
Key Research Question:
w How does corporate governance influence firm valuation?
Supplementary Research Questions:
w How does corporate governance influence firm level performance?
w How do firm-specific control variables influence firm valuation?

Methodology
This study will consider five listed commercial banks1 of Bangladesh accumulating financial data from their
respective annual reports 2013 to 2017. To estimate the impact of corporate governance on firm valuation, this
research has used the model suggested Morck, Shleifer, and Vishny (1988) and McConnell and Servaes (1990).
We have also checked the robustness of the following model through controlling size, leverage and intangible
fixed assets and revealed the findings as consistent.

NAVit=α0+α1 CEODit+α2 BDSit+α3 TAit+α4 ISDit-1+α5WNDit+α7 AGEF

+α8 MSHt+α9 ASGt+εit
FVit=NAVit=α0+α1CEODit+α2BDSit++α3 TAit+α4 ISDit-1+α5WNDit
+α7 AGEF+α8 MSHt+α9 ASGt+εit

Here, FV refers the market value of shares and NAV for net asset value. We have measured the impact of
corporate governance through CEO duality (CEOD) a binary variable with 1 (when CEO duality) and 0 as
otherwise, board size (BDS), institutional director (ISD), women director (WND) and management shareholding
(MSH) variables and added other firm specific control variables like Firm Size as measured the log of total assets
(TA), age of the firm (AGE), asset growth (ASG) etc. Though the methodological components are dependable
and concrete in testing the hypothesis, the concern of endogeneity can be even managed though adopting an
instrumental variable approach.

Analysis and Findings

It is surprising that the analysis is STATA did not show any significant impact of corporate governance on market
value of share. It is somehow related with the efficient market hypothesis (Fama, 1991). Therefore, we have
moved with the dependent variable, Net Asset Value (NAV). Table-1 shows descriptive statistics of all dependent
and explanatory variables that have been considered in this study. The sample has mean NAV of Tk. 92.99 with
Tk. 93.74 standard deviation. The minimum level of NAV is Tk. 16.86 and the maximum is Tk. 444.52. The all
other explanatory variables also present their means, standard deviations, maximum and minimum values.
Table-1: Descriptive Statistics
Variables N Minimum Maximum Mean Std. Deviation
NAV 50 16.86 444.52 92.99 93.74
CEOD 50 0 1 .16 .37
BDS 50 0 1 .5 .505
TA 50 23.8 226.52 30.40 28.32
ISD 50 0 1 .82 .388
WND 50 0 1 .64 .4848
AGE 50 18 58 39.7 9.88
MSH 50 0 1 .5 .505
ASG 50 .33 .25 .123 .045
Source: STATA Output

1 The name of those five listed commercial banks of Bangladesh has not been revealed here for ethical concern.

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 Table-2: Correlation Matrix
NAV CEOD BDS TA ISD WND AGE MSH ASG
NAV 1.0000
CEOD -0.0570 1.0000
BDS -0.6630 -0.2182 1.0000
TA -0.0876 -0.0695 0.1253 1.0000
ISD -0.3171 -0.5055 0.4685 0.0595 1.0000
WND -0.0536 -0.2409 0.1667 0.1158 0.6247 1.0000
AGE 0.2024 -0.4214 0.1982 -0.0994 0.4643 0.2792 1.0000
MSH -0.5745 0.1091 0.2000 0.1394 -0.0521 -0.1667 -0.2758 1.0000
ASG -0.1377 -0.0335 0.1561 -0.0153 -0.0603 -0.1926 -0.0579 0.0436 1.0000
Source: STATA Output
Table-2 shows the pattern how the dependent and explanatory variables are interrelated with one another.
Dependent variable, NAV has positive relationships with AGE (.2024) and negative relationship with CEOD, BDS,
TA, ISD, WBD, MSH and ASG. There is a mix of contrasting and consistent correlations among the variables.
Table-3: Regression Analysis
NAV Coef. Robust z P> |z| [95% Conf.
Std. Err. Interval]
CEOD -43.2949 16.05547 -2.70 0.007 -74.76305 -11.82676
BDS -97.69393 31.86815 -3.07 0.002 -160.1544 -35.2335
TA .2065371 .1349349 1.53 0.126 -.0579305 .4710048
ISD -82.82909 30.13666 -2.75 0.006 -141.8959 -23.76233
WND 9.736174 24.42181 0.40 0.690 -38.1297 57.60205
AGE 2.616544 1.221708 2.14 0.032 .2220396 5.011048
MSH -72.55752 20.91685 -3.47 0.001 -113.5538 -31.56126
ASG -78.60999 95.63027 -0.82 0.411 -266.0419 108.8219
_cons 146.2654 57.70203 2.53 0.011 33.17153 259.3593
Dependent Variable: Net Asset Value Per Share
Source: STATA Output
Regression model in the table-3 specifies that total assets, women directorship and firm age have positive
impacts on sample banks’ net asset value (NAV) and besides, CEO duality, board size, institutional directors,
managerial shareholding, asset growth have negative impacts. Findings show contradictory conclusion with the
traditional hypothesis in case of institutional directorship and asset growth variables. The model finally accepted
alternative hypotheses that CEO duality, board size, institutional directorship, age of the firm and managerial
shareholding has significant negative impacts on sample banks’ NAV. These all signify that corporate governance
is an instrumental matter in firm valuation.
Table-4: Regression Analysis
NAV Coef. Robust z P > |z| [95% Conf.
Std. Err. Interval]
CEOD -29.19222 10.07612 -2.90 0.004 -48.94104 -9.44339
BDS -57.88199 32.64969 -1.77 0.076 -121.8742 6.110223
ISD -79.65502 19.17995 -4.15 0.000 -117.247 -42.06302
AGE 2.104678 1.50158 1.40 0.161 -.8383654 5.047721
MSH -84.53836 29.76777 -2.84 0.005 -142.8821 -26.1946
_cons 150.6373 57.79635 2.61 0.009 37.35856 263.9161
Dependent Variable: Net Asset Value Per Share
Source: STATA Output

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With the findings of coefficients shown in table-3, the model has been further modified only considering the
significant independent variables with a view to making the model more intensive. In that regression, the impact of
all considered independent variables is found as significant except the age of the firm. Finally, following regression
model has been developed for measuring the impact of corporate governance on sample banks’ value including
only the accepted variables.

NAV = 150.63 14.84 -29.19*CEOD – 57.88*BDS – 79.66*ISD – 84.54*MSH + e

Conclusion
Motivated by the conflicting views of earlier researches, this study has examined the impacts of corporate
governance variables on the banking institutions of Bangladesh. The study found that CEO duality, large board
size and managerial shareholding have negative impact on firms’ value as expected according to literature.
Theoretically, CEO dominance, dispersed board size, joint ownership and managerial participation have
significance relevance in spreading agency problem that hinders firms’ performance and value. This study further
revealed that control variables like, firm size and age of the firm have positive impact on firm valuation. Though
these impacts are not significant, they largely contributed to examine the impact of the governance variables
much extensively. After all, the research has much contribution to the literature that studies the importance
of corporate governance on firm valuation in a developing country context. In particular, it proves that there
is a growing concern for governance practices in corporate decisions for better firm level performances in a
fragile institutional and regulatory framework like in Bangladesh. However, the impact of institutional directorship
discloses a negative impact on firm value which is against the traditional literature in corporate finance. Also, most
interestingly the study could not establish any significant causal relationship between the corporate governance
variables and firm’s value (measured in market value per share) reported in the annual reports of those sampled
banks. The lack of that relationship can somehow be related with the weak form of market efficiency. As stock
markets in Bangladesh cannot truly reflect all the inside and public information in their asset pricing. Also, the
study is limited in sample size and period, extended sample size could pose more reliable and robust result which
could be an important topic for further research. Finally, the study recommends the careful concern in board
formation and diversity, active separation between ownership and management with a view to ensuring better
financial performance and value.

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