Reform, Financial Systems and Legal Frameworks
The CRC Series on Competition, Regulation and Development
Edited by Thankom Gopinath Arun and John Turner
Chapter 6: The Corporate Governance Role of Capital Markets: A Bangladesh Perspective
Faizul Haque INTRODUCTION The capital market of a country can exert considerable influence on the firm by imposing certain rules and regulations relating to the firm’s governance practices. While the legal and regulatory structures are essential, the capital market, with adequate transparency and accountability in place, can ultimately reward or punish firms for their governance practices (Drobetz et al., 2004; Gompers et al., 2003, make a similar observation). The capital market can wield its governance role in mitigating agency problems through disciplining the management and improving the firm’s overall governance. This chapter explores the corporate governance role of the capital market of Bangladesh. It is structured as follows. The next section reviews the literature on the governance role of capital markets, and explains the methodological issues; this is followed by an overview of the securities market of Bangladesh, together with the efficiency of the pricing mechanisms. The fourth section analyses the activism of the regulatory institutions in relation to regulatory provisions and their enforcement. The next section explains the governance role of the financial intermediaries, including institutional investors and banks. A final section concludes the chapter. LITERATURE REVIEW In addition to capital allocation (for example mobilizing savings, pooling risks and sharing opportunities), capital markets enhance governance practices through information production and monitoring (Tadesse, 2003). Singh et al. (2002) and Claessens (2003) refer to direct governance 80 The corporate governance role of capital markets 81 measures of the capital markets, which include: tightening listing requirements, controlling insider dealing arrangements, imposing disclosure...
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