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How financial market in Bangladesh appraises efficiency?

Author

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  • Syed Manzur Quader

    (Chittagong Independent University)

  • Mohammad Nayeem Abdullah

    (Chittagong Independent University)

Abstract

This paper investigates how firm-level efficiency has been appraised by both capital market and money market in Bangladesh using an unbalanced panel of 137 public limited companies listed in Dhaka Stock Exchange over the period 2006–2016. Efficiency is measured as the distance from the industry’s ‘best practice’ production frontier. Stochastic Frontier Analysis (SFA) method is applied to construct the frontier using a Cobb–Douglas production function of employment and fixed capital determining output of firms. We find a U-shaped relationship between efficiency and the market value of the firms which indicates that the capital market positively values efficient utilization of resources by matured firms. Besides, our results show a U-shaped relationship between efficiency and leverage as well which indicates a dominance of the franchise-value hypothesis at the lower level of efficiency and a dominance of the efficiency-risk hypothesis over the other. Different estimation techniques and model specifications have been used to check robustness and consistency of our results controlling for unobserved firm-specific effects and endogeneity. The results obtained in this paper imply that improved efficiency can be applied as a strategic indicator to the shareholders for assessing firm value and to the financial institutions for assessing debt capacity of the firms.

Suggested Citation

  • Syed Manzur Quader & Mohammad Nayeem Abdullah, 2020. "How financial market in Bangladesh appraises efficiency?," Economic Change and Restructuring, Springer, vol. 53(3), pages 475-494, August.
    • Handle: RePEc:kap:ecopln:v:53:y:2020:i:3:d:10.1007_s10644-019-09259-3
    DOI: 10.1007/s10644-019-09259-3
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    Cited by:

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    2. Yingying Shi, 2024. "Corruption, technical efficiency and total factor productivity growth: empirical evidence from China," Economic Change and Restructuring, Springer, vol. 57(6), pages 1-24, December.
    3. Quader, Syed Manzur, 2023. "The interplay between uncertainty, managerial decision making, and firm value: Evidence from Bangladesh," Journal of Economics and Business, Elsevier, vol. 123(C).

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    More about this item

    Keywords

    Efficiency; Market value; Leverage; Financial distress; Non-monotonicity; Stochastic frontier; Fixed effects; GMM;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G19 - Financial Economics - - General Financial Markets - - - Other
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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