Development of Capital Market in Bangladesh : A Study on Dhaka Stock Exchange Limited

Abstract

In the context of development of capital market in Bangladesh , Dhaka Stock Exchange (DSE), occupies a very important and significant place. Some scholars earlier did some limited works relating to the capital market development in Bangladesh. But no in-depth study was earlier done on capital market development in Bangladesh. The present study, therefore, aims at evaluating the overall performance of capital market development in Bangladesh with special reference to Dhaka Stock Exchange (DSE,pFor this purpose required data were collected from secondary and primary sources. In a developing economy like Bangladesh, stock exchange has a vita l role to play in the economic growth and development of the country through which capital market development can be ensured. It is not so easy task to evaluate the performance of DSE and its role in the development of capita l market. However, attempts have been made to analyze the activities of DSE and to see to what extent its objectives were achieved. This work also examines and analyses the historical profile including objectives and function of DSE with a view to see to what extent its basic operations are successful. It also finds out the deviation, their causes and suggests the remedies. However, the specific objectives of the study are ( 1) to review and analyze the growth trend of the activities of DSE and to evaluate its performance; (2) to evaluate the performance of Mutual Funds in the development of Capital Market of Bangladesh; (3) to evaluate the role of ICB and other Development Financing Institutions (DFls) in the development of capital market of Bangladesh; (4) to analyze the risk return relationship in the DSE before and after automation; (5) to analyze the dividend payment practices of listed companies and its impact on security prices in the DSE over the years; and (6) to identify the problems and to suggest measures for improving its performance. The study was primarily based on secondary data and information in relation to the stock exchange. The secondary sources include: dissertations, research article, scientific papers, journals, editorials of national dailies and such other articles and research reports on stock exchange. In the analysis of growth trends, simple growth rate, compound growth rate and trend growth rate were calculated. In addition to these, mutual funds' rates of return were calculated on the basis of Capital Asset Pricing Model (CAPM). Moreover, Krusal Wallis Test was also used in analyzing the risk return behavior of DSE before and after automation. In this work, growth trends of the activities of DSE are analyzed. Over the last 25 years, DSE expanded a lot of business and operational activities. After liberation, trading activities were resumed in 1976 with only nine (9) listed companies. At that time, the total paid up capital of the listed companies of the Exchange was only Tk. 137.53 million. The study reveals that the growth trends of different activities of DSE over the last 25 years were positive in all respects. But the growth trends of DSE's all share price index show insignificant compound growth rate, (i.e. , 7 02% only). Growth trends of public issue, turnover of share and debenture, listed companies' paid-up capital, market capitalization show the signs of better management and good performance. But th e current management practice of DSE, in managing the share price index and individual share price, is not sound. Manipulation activities and short selling or insider trading is going on in the DSE. After the crash in 1996, the capital market authority took several reform measures but still the market is not corrected . This is very alarming for the development of capital market in Bangladesh. Mutual funds' performance has been examined and analyzed in this th esis. A risk adjusted measure of performance has been done by using the Treynor index, the Shape index and the Jensen index. Those show that the first ICB mutual fund is one of the best performing fund. But the other funds were performing better than the market with a considerable degree of flu ctuations. For the development of capital market in Bangladesh , Investment Corporation of Bangladesh (ICB), and other Development Financing Institutions (DFls) are playing a significant role since long . Role of ICB including DFls has been examined and analyzed in this thesis. The findings suggest that merchandising operational performance of ICB may be considered efficient. But the current management practice of ICB in connection with financial assistance operation is not sound. Various companies enjoy underwriting and bridge financing facilities but they are not repaying their loans in time. The present loan recovery position of ICB is not satisfactory. For sound development of capital market, th is situation is harmful. In providing underwriting and bridge financing facilities to the enterpreneurs, the Corporation should be cautious and selective After implementation of projects, supervision activities should be carried on and strengthened. Before disbursing any financial assistance to any entrepreneur, efficient professionals should appraise and examine the projects. The research findings show that the appraisals as well as other associated personnel are not doing their jobs efficiently and they are not in a position to detect weak cases. Dividend policy of a company has great impact on the share price of a company. Event study methodology is employed to measure the security price performance. Before and after automation, the impact on security prices after the dividend announcement has been analyzed in

this thesis. Dividend announcement is an instrument, which reflects information about the company. In this analysis, it is found that dividend announcement has a strong signaling device which influence the securities' prices. The analysis shows that in the DSE, there is no dividend announcement effect; and dividend announcement does not carry positive information about the company. The ineffectiveness of the regulatory agencies sometimes causes distortion in the market. It may be mentioned that presence of kerb market is an example of ineffectiveness of the regulatory bodies and the government policies. In risk return behavior analysis, Capital Asset Pricing Model (CAPM) has been used to evaluate the relationships between risk and return before and after automation. The expected relationship between risk and return is displayed by Securities Market Line (SML). The SML is a mirror where in, the risk-return combinations are reflected . Share price index in the DSE was high in November 1996 and the index reached upto 3600 points. To check the artificial bull market in 1996 several reform measures including automation in the DSE were taken by the government and some other donor agencies. Risk return behavior analysis and estimated SML has been computed in th is thesis. The test results indicate that the market didn't improve and even after automation manipulative activities continued till today. The damage caused by 1996 debacle seems to be irreparable for bringing back investors' confidence in the market. Bangladesh stock markets have grown significantly during the last two decades. Still, the size of the market is relatively small compared to other Asian markets. Moreover, liquidity was very insignificant in Bangladesh . So, Bangladesh's capital market can be characterized by a thin market having small market capitalization ratio and low level of liquidity. Adequate measures are to be taken to expand this market. It has been observed from the analysis that co-variance is very unusual in case of 81 h mutual fund i.e ., negative return which implies something abnormal. These abnormalities should strictly be checked by the controlling authority Other mutual funds were also performing better than the market but with a limited degree of fluctuations. So, it is recommended that for the development of capital market of Bangladesh, ICB should take adequate measures in investment sectors through which ICB can ensure smooth and healthy return for all the mutual funds for the benefits of the general public. The healthy growth of ICB is depended mainly upon two aspects i e , investment and recovery. Therefore, ICB should undertake feasibility studies for identification of proper investment projects in different sectors of the economy and take adequate measures for recovery. Proper monitoring and evaluation of investment projects is a pre-requ isite for ensuring good returns

Introduction of automation in the DSE did not make any significant impact on risk return relationship of stocks of DSE. But it was expected that the automation measure would improve the situation. So, the authority should take more care in attaining better results. The stock price manipulation in 1996, heavily damaged the scope of emerging stock market for which the marginal investors lost the confidence. But it has been observed that all reform programs and regulatory measures to improve the unhealthy situation of DSE, failed to achieve the desired resu lt. If stock markets are considered leading indicators of an economy, then one should conclude that the economic fundamentals are not healthy for the economy as a whole. But this situation should not be allowed to continue for long. Attempts should be made at both public and private levels to improve the situation. Researchers observe that dividend announcement is a strong signaling device, which influences the security prices. The study shows that the Dhaka Stock Exchange's, dividend announcement does not carry positive information about the company. This effect may be a result of many factors. But those evil factors should immediately be removed. This price-pressure effect after the dividend announcement date may nullify the effect of dividend announcement on the stock price. So, th is tendency should be reduced by proper training and motivation. Capital market of Dhaka is still an in fant market, which still needs proper care taking and nursing to accommodate all the avenues of security trading here. So, the regulatory body should be stronger and effective enough to reduce the effect of kerb market All the listed companies in the DSE should maintain a good and healthy dividend policy through which capital market investment can be geared up Out of total 12 sectors, only a few sectors are providing a handsome and sound dividend payment to the shareholders, namely investment, engineering and pharmaceuticals and chemicals. Since the test result shows that there is no dividend announcement effect in the security price in the DSE, it is therefore suggested that manipulation, insider trading and presence of kerb market should be abolished to develop the capital market in Bangladesh.