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Stock Market Development & Economic Growth in Bangladesh sample essay

1. Introduction Capital markets are the promoter of economic expansion of a country engaged in exchange of capital instruments, like securities, bonds, treasury bills, notes etc to achieve economic goals. In Bangladesh, there are 2 stock exchanges. Dhaka Stock Exchange (Generally known as DSE) is the main stock exchange of Bangladesh. East Pakistan Stock Exchange Ltd was finally named as Dhaka Stock Exchange (DSE) on 14 May 1964. Although incorporated in 1954, formal trading started in 1956. Prior to independence in 1971, the number of listed companies in DSE was 196 with a total paid up capital of BDT. 4 billion.

The total number of listed companies is now 297. The Dhaka Stock Exchange (DSE) is registered as a Public Limited Company and its activities are regulated by its Articles of Association rules & regulations and by-laws along with the Securities and Exchange Ordinance 1969, Companies Act 1994 & Securities & Exchange Commission Act 1993. The major functions of DSE are listing of Companies, providing the screen based automated trading of listed Securities, settlement of trading, gifting of share or granting approval to the transaction or transfer of share outside the trading system of the exchange, market administration & control, market surveillance, publication of monthly review, monitoring the activities of listed companies, Investors Grievance Cell, Investors Protection Fund, announcement of price sensitive or other information about listed companies through online.

Ensured that no sponsor or director shares of ‘Z’ category companies, excluding bank, insurance and financial institutions, are transacted on the stock exchanges or transferred outside the stock exchanges in any other form until further order with a view to facilitating the interest of investors and securities market. On the other side, Chittagong Stock Exchange (CSE) began its journey in 10th October of 1995 from Chittagong City through the cry-out trading system with the promise to create a state-of-the art bourse in the country.

Founder members of the proposed Chittagong Stock Exchange approached the Bangladesh Government in January 1995 and obtained the permission of the Securities and Exchange Commission on February 12, 1995 for establishing the country’s second stock exchange. The Exchange comprised of twelve Board members. The objectives of CSE are to develop a strong platform for entrepreneurs raising capital, to provide a fully automated trading system with most modern amenities to ensure quick, easy, accurate transactions and easily accessible to all, to undertake any business relating to the Stock Exchange, such as a clearing house, securities depository center or similar activities, to develop a professional service culture through mandatory corporate membership, provide an investment opportunity for small and large investors, attract non-resident Bangladeshis to invest in Bangladesh stock market, collect preserve and disseminate data and information on stock exchange, develop a research cell for analyzing status of the market and economy.

Now, let’s just take a look backward. Realizing the importance of stock market on economic growth, prudential authorities such as World Bank, IMF and ADB undertook the stock market development programs for emerging markets in developing countries during 80s and 90s and the emerging stock markets have experienced considerable development since the early 1990s. The market capitalization of emerging market countries has more than doubled over the past decade growing from less than $2 trillion in 1995 to about $5 trillion in 2005 (Yartey, 2008). In October 2007, the global equity, i.e., the Market Capitalization (MCAP) of all companies in world stock markets, stood at $62.5 trillion, very close to that year’s world Gross Domestic Product (GDP) figure of $65 trillion.

Then the American sub-prime crisis hit the shores, banks collapsed and financial institutions went belly-up. A jaw-dropping $37 trillion of wealth in the form of market cap was wiped out in 18 months up to the multi-year lows that were reached at $25.5 trillion on March 9, 2009, was 59% of public company values. Since then, however, equity values have risen 37%, a wealth-growth of $9.5 trillion – to just over $37 trillion. As a percentage of world market capitalization, emerging markets are now more than 12 percent and steadily growing (Standard and Poor, 2005).

The assessment of the growth of Bangladesh stock market over the last few years thus remains an important empirical issue. Decision was taken that the existing price limit prescribed for A, B, G, and N-category companies shall also be applicable for ‘Z’- category companies. The maximum rate of margin loan @1:1 for Merchant Banker (Portfolio Manager) was re-fixed then. Based on this, Merchant Banker can provide loan to their clients up to that ratio or equivalent to the amount of securities sold by its clients with effect from 10 February 2008 until further order. 205 enforcement actions were by the Commission against the issuers and other market intermediaries who failed to comply with the securities related rules during FY08. The government of Bangladesh also undertook the Capital Market Development Program (CMDP) supported by the ADB on 20 November 1997.

The CMDP aimed to broaden market capacity, to develop a fair, transparent, efficient domestic stock market to attract larger amounts of investment and to improve the governance scenario of Bangladesh capital market. Another issue with this project was the ‘Improvement of Governance’ for which initiatives were taken to set up an oversight body named “Financial Reporting Council” to ensure on time preparation of financial statements by the issuers reflecting true state of financial affairs of issuer companies and also to ensure objective auditing of the same by statutory auditors in adherence to International Standard on Auditing.

This study provides analytical measures of the level of stock market growth in Bangladesh by analyzing key indicators of stock market development. Here some discussion & findings regarding the relationship between financial reporting & economic growth have also been obtained through different statistical & financial analysis.

2. Objectives of the study The objectives of the study covers : Firstly, the investigation of the stock market development in Bangladesh Secondly, the acceleration of the economic growth of Bangladesh. Thirdly, the relationship between the stock market development & economic growth, as the stock market of Bangladesh effects the economic growth either directly or inversely or none. And finally, how much the disclosure in financial statements of the listed companies in stock exchange affects the companies cost of capital & thus economic progression.

3. Literature Review The empirical studies on the relationship between stock market development & economic growth is being continued over years. From theoretical aspects, the traditional literature regarding growth was not suitable to see the sights of relationship between financial market or intermediation & economic growth because it focused on steady-state level of efficiency of capital stock, but not on the rate of growth. Levine (1991) found in an empirical study that there is strong & statistically significant relationship between stock market & GDP growth. In that study it was shown that the stock markets have the level effect as well as the rate effect.

It was also argued that the stock market liquidity i.e., the ability to trade equity easily- plays a key role in accelerating economic growth. Pagano (1993) came to a conclusion that financial growth can affect the rate of economic growth by altering productivity growth & the efficiency of capital. Demetriades & Hussain (1996), in their answer to the question “Does financial development cause economic growth?” discovered that there is bi-directionality & reverse causality between financial development & economic development. Mohtadi & Agarwal (2001), in a dynamic panel method study, suggested that there remains strong association between stock market development & long-run economic growth even after controlling for lagged growth, initial GDP level, Foreign Direct Investment (FDI), Secondary School Enrollment (SSE) & Domestic Investment.

Also the paper shows that the market liquidity (Turnover Ratio) and the market size (Market Capitalization Ratio) have direct & inverse impact on growth. Their result supports the theoretical literature by Levine (1991) in suggesting that the stock market development leads to higher growth by reducing both productivity and liquidity shocks. Deb & Mukharjee (2008) explored a causal relationship between stock market development & economic growth where the result shows bidirectional causality between real GDP growth rate & real market capitalization ratio and a unidirectional causality from both stock market activity & volatility to real GDP growth.

From the accounting point of view, some literatures were showed in detail the impact of financial statements reporting standards. Disclosure-related literature has been developed into a distinct section named economics & accounting and can show the relationship between economic & accounting findings together. In respect to find out the impact of accounting information disclosure on economically efficient decisions, researchers have studied over the years. Some direct evidences of intense disclosure efforts of the firms’ in offering public debt & equity have been obtained by Lang & Landholm (1993), Frankel (1995), Healy (1999) and so on.

Again disclosure of information is socially desirable to public. As such, better disclosure is a better approach to a company’s exposure & those companies are more reliable & acceptable to public for investment having detailed information disclosure by following the local & global standards. Mohammed (2008) presented a clear view of the importance of disclosure on the economy of India by determining disclosure index of the Indian banks with the help of mandatory & voluntary disclosures set by different standards & researchers respectively.

He drew a conclusion that better disclosure leads to investors & depositors confidence by assuring a clean & clear transparency and thus can contribute to the growth of economy. From my study I wish to reveal some output regarding the direction of relationship between stock market development & economic growth from the context of Bangladesh, as no analytical study regarding economic analysis & accounting information systems together had not been performed up to this extent on this issue.

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