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1. Introduction
A firm’s ability to persuade investors about the firm’s governance quality appears to influence the equity financing of a firm. Better corporate governance and associated stronger shareholder rights reduce agency costs (Gompers et al., 2003), which in turn enhance a firm’s ability to gain access to equity finance. While many studies (Haque et al., 2011; Drobetz et al., 2004) investigate the influence of corporate governance on debt finance or on cost of equity capital, the literature on the empirical relationship between firm-specific corporate governance and firm’s equity finance appears to be limited. Several studies (Céspedes et al., 2010; Patibandla, 2006) consider individual governance issues such as ownership or management structures, rather than overall firm-level governance practices. No study to date focuses on the linkage between corporate governance and equity financing in Bangladesh.
This study contributes to the existing agency theory-based literature on the relationship between corporate governance and equity finance from the perspective of an emerging economy such as Bangladesh, where the capital market and the corporate sectors are very weak, and the financial system is predominantly bank-based. Bangladesh represents an interesting case for this study because the country’s financial sector has been experiencing reform initiatives since 2001. However, little is known about the effect of financial sector reform on capital market development in terms of relatively better corporate governance practices and better investors’ confidence. This study is likely to have important policy implications in relation to the impact of financial sector reform that was undertaken to strengthen the capacity building of the capital market. This paper investigates the influence of firm-level governance quality on equity finance of 101 non-financial listed firms in Bangladesh.
Another important motivation of this study is to measure overall corporate governance practices of a firm rather than the individual governance component. This is because several inter-related factors including the ownership pattern, independence and responsibilities of the board and management, transparency and accountability and responsibility towards stakeholders tend to influence firm-level corporate governance. This study uses ordinary least square (OLS) regression to examine the effect of a firm’s overall governance quality measured through a corporate governance index (CGI). The findings of the study support the prediction of the agency theory, with a statistically significant positive...