Effects of Corporate Governance Guidelines on Investors: An Experimental Examination of Bangladeshi Investors’ Decisions

Abstract

The main purpose of the study is to examine whether investors assign importance to corporate governance in making investment decisions. The study involves a 2x2x2 between-participant experiment on real investors that examines the effects of corporate governance structure, financial condition and insider trading on individual investor decisions. The findings of this study extend the literature on corporate board practices and investor perceptions by providing evidence from this emerging economy that strong corporate governance has a positive impact on investor decisions. The study also confirms the findings of prior literature that financial condition of a company positively influences investor decisions. Hence, the results provide insights into the effects of strengthening corporate governance guidelines and of variation in financial condition on investor decisions. The study provides evidence that the common occurrence of illegal insider trading in the emerging market of Bangladesh does not appear to impact on investor decision making, unlike in developed countries.

The results of this study also contribute to understanding of how the quality of corporate governance impacts on decision making. It appears that governance directly impacts the perceived reliability of financial reports and trust in the board and management and that these factors fully mediate the impact on investor decision making.

The theoretical model and instrument developed for this study will be useful for further studies to explore the impact of other corporate governance factors on investor decisions. Furthermore, the theoretical model and instrument will also be useful for further studies in other developed and developing countries, particularly where insider trading is regarded by investors as being a concern and to investigate the impact of other corporate governance factors on investors and financial analysts.