How financial market in Bangladesh appraises efficiency?

Syed Manzur Quader () and Mohammad Nayeem Abdullah ()
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Syed Manzur Quader: Chittagong Independent University
Mohammad Nayeem Abdullah: Chittagong Independent University

Economic Change and Restructuring, 2020, vol. 53, issue 3, No 5, 475-494

Abstract: 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.

Keywords: Efficiency; Market value; Leverage; Financial distress; Non-monotonicity; Stochastic frontier; Fixed effects; GMM (search for similar items in EconPapers)
JEL-codes: C23 D24 G19 G32 G33 L20 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s10644-019-09259-3

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