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Department of FinanceJagannath University, Dhaka

GROUP MEMBERSName ID No.

Mohammad Fayez Uddin M110203011

Rifat Islam M110203009

Nur-A-Afsana M110203023

Bubli Rani Saha M110203059

Mohammad Alamgir Hossain M110203051

Md. Abdul Mumen M110203012

Md. Maruf Hassan M110203063

Topics:“Corporate Governance and the Return on Investment: A Case Study on Bangladesh”

Mohammad Fayez Uddin-M110203011

Corporate governance is the set of processes, customs, policies, laws and institutions affecting the way in which a corporation is directed, administered or controlled. The aim of corporate governance is to ensure that companies that are not managed by their owners are run in the best interest of the shareholders in terms of return on Investment .

Introduction

Understanding Corporate Governance

A somewhat broader definition would be to define CG as a set of mechanisms through which a single country or firms within a country operates when ownership is separated from management.

Mohammad Fayez Uddin-M110203011

Corporate governance therefore calls for three factors:Transparency in decision-making;Accountability which follows from transparency because responsibilities could be fixed easily for actions taken or not taken, and; The accountability is for the safeguarding the interests of the stakeholders and the investors in the organization.

Rifat Islam-M110203009

Capital market in Bangladesh is still at an emerging stage with market capitalization amounting to only 6.5% of GDP with low investor confidence on corporate governance and financial disclosure practices in many companies listed in the stock exchanges.

Rifat Islam-M110203009

Issues in Corporate Governance in Bangladesh

The past few years have witnessed a silent inclination towards CG due to a variety of forces that are acting today and would become stronger in years to come.

•Deregulation•Disintermediation•Institutionalization•Globalization

Nur-A-Afsana – M110203023

While these factors will make the markets more effective in disciplining the dominant shareholder.

Corporate ownership structuresInadequate Bankruptcy LawsLack of Shareholder ActivismAccounting standards, audit and disclosureWeak Pressure GroupsWeak Capital Market Role etc.

Nur-A-Afsana – M110203023

There are many things that the government and the regulators are yet to do to enhance this ability. Some of these individual elements can be portrayed with a view to seeing their weaknesses in implementing CG:

A Need for Corporate Governance is UrgentFollowing policy is intended to clarify these relationships and responsibilities and to promote effective CG:

Disclosure of informationRegulatory measures Reforms in bankruptcy and related laws Passive shareholdings could be transferred to other investors who could exercise more effective discipline on the company managements.

Md. Maruf Hasan – M110203063

Corporate control and investmentThe rise of the modern corporation,

with its separation of owners and financiers from the management, has created a set of agency problems that can cause investment decisions to deviate.

Md. Maruf Hasan – M110203063

In the absence of agency problems, investment decisions and firm performance should be expected to be independent from the structure and concentration of ownership. However, if agency problems can be attributed to the fact that firms are incorporated one should no longer expect firm value and investment decisions to be independent from ownership structure and concentration.

Berle & Means (1932) and Jensen & Meckling (1976) ArgumentThe owner-manager will not bear

the full cost of on-the- job-consumption. Potential minority investors will realize this and subsequently the share price will reflect the divergence of interest between owner-managers and minority shareholders.

Md. Maruf Hasan – M110203063

They argue that investors with high stakes will also have strong incentives to maximize firm value.

On the basis of their argument scholars construct three hypothesis. These are -

H1: Ownership concentration will reduce agency conflicts and thereby improve investment performance.

Md. Alamgir Hossain-M110203051

H2: Ownership concentration will be associated with both positive incentive effects and negative entrenchment effect and ownership will as a consequence have a non-liner effect on performance.H3: Control-mechanisms, such as dual-class equity structure, will through separation of control and cash-flow rights alter the incentives of controlling owners, and as a consequence the incentive effect will be weekend and the entrenchment effect will be enhanced.

Main Hypotheses

Hypothesis 1: For companies located in countries with strong corporate governance systems, qm ≥ 1.

Md. Alamgir Hossain-M110203051

Hypothesis 2: For companies with limited investment opportunities that are located in countries with weak corporate governance systems, q m < 1.

Legal Institutions and Returns on Investment

Main Hypotheses

Md. Alamgir Hossain-M110203051

Hypothesis 4: In countries with weak corporate governance systems, companies with widely dispersed shareholdings have higher qms than the other companies in their country group.

Legal Institutions, Ownership Structures and Returns on Investment

Hypothesis 3: In countries with strong corporate governance systems, companies with widely dispersed shareholdings have lower qms than the other companies in their country group.

Main Hypotheses

Bubli Rani Saha- M110203059

Hypothesis 6: For companies with qm,I < 1, 1> qm,D > qm,CF and qm,D > qm,E

Returns on Investment out of Different Sources of Finance

Hypothesis 5: For companies with qm, i ≥ 1 , it is also true that qm,CF ≥ 1 , qm, D ≥ 1 , and qm, E ≥ 1.

Methodology

Bubli Rani Saha- M110203059

1. ROI= (Earnings – Initial Investment)/ Initial investment

The formula for return on investment sometimes referred to as ROI or rate of return, measures the percentage return on a particular investment.

General Formula:

2. % ΔX = (Xt-Xt-1) / Xt-1

ΔX= Changes in XT= at time t3. Let, It be a firm's investment in period t, CFt+j the cash flow this investment generates in t+j , and it the firm's discount rate in t.

Methodology

Bubli Rani Saha- M110203059

1. PVt = Itrt / it = qmt It

Measures of investment performance: Dividends, Tobin‘s q, Marginal qTobin’s q is a measure of average performance

2. The market value of the firm at the end of period t can be defined as M t = M t −1 + PV t − δ t M t −1 + µ t

3. Where δ, is the description rate µ t , is the market’s error in evaluating Mt. Subtracting Mt-1 from both side and replacing PV t with qmt It yields: Mt - Mt-1 = qmt It - δt Mt-1 + µt

Impact of Different Factors of corporate governance with return

Md. Abdul Mumen - M110203012

InvestmentThe Impact of Accounting StandardsThe Effects of Creditors’ RightsThe Impact of Strong Contract EnforcementAgency problem

Conclusion

Md. Abdul Mumen - M110203012

Our study holds differences in legal institutions and ownership structures to be important in explaining differences in company returns on investment relative to their costs of capital, qm. Of these two sets of institutions, the origins of a country’s legal system proved to be the most important.agency problems can be mitigated by the institutional structures of a country. Legal institutions that strengthen shareholder rights do bring about superior investment performance. Managers who wish to undertake low return investments in countries with strong corporate governance systems prefer to rely on internal cash flows to finance these investments.

Any Query?

The End