Internship Report by Shoeb Ahmed

FINANCIAL PERFORMANCE AND CHARACTERISTICS OF PHARMACEUTICAL AND CHEMICAL INDUSTRY IN BANGLADESH: MULTINATIONAL VERSUS DOMESTIC CORPORATIONS
by
Shoeb Ahmed ID # 0330056
An Internship Report Presented in Partial Fulfillment of the Requirements for the Degree Bachelor of Business Administration
INDEPENDENT UNIVERSITY, BANGLADESH May 2008
by
Shoeb Ahmed ID # 0330056
has been approved May 2008
_________________
Dr. Osman Goni Assistant Professor School of Business
May 18, 2008 Dr. Osman Goni Assistant Professor School of Business, Independent University, Bangladesh.
Dear Sir: I, hereby, submit you the report on Financial Performance and Characteristics of Pharmaceutical and Chemical Industry in Bangladesh: Multinational versus Domestic Corporations, which has been prepared as a partial fulfillment of the degree Bachelors of Business Administration. This is the first time a study was performed comprehensively on my part and I have tried my level best to complete the study in a proper way despite having limitations. It is hoped that proper assessment will be done on my report considering the limitations of this study. Your benign and authoritative advice will encourage me to conduct further flawless research in future.
Yours sincerely
____________ Shoeb Ahmed. ID # 0330056
ACKNOWLEDGEMENT
In preparing the long and rigorous internship report, I acknowledge the encouragement and assistance given by a number of people and institution. I am most grateful to the management of GlaxoSmithKline Bangladesh Limited for gave me the opportunity to complete my internship in their organization. I would like to express my gratitude to my supervisor Dr. Osman Goni for providing me detailed feedback and technical advice on this report. He always gave me his suggestions in making this study as flawless as possible. I would also like to render my sincere thanks to Mr. Sarwar Azam Khan (Finance Director), Mr. Anisuzzaman (Finance Operation Manager) of GlaxoSmithKline Bangladesh Limited providing me guidance, inspiration and above all flexibility of work. Finally, I would like to thank Mr. A.N.M Giasuddin (Deputy Inspector), Law department, Bangladesh Bank who had given me appointment from his precious time to collect data for my report also helped me to understand many related matters.
Table of Content
Page
List of Tables List of Figures Executive Summary 1.0 Introduction 1.1 Purpose of the Study 1.2 Problem Statement 1.3 Methodology 1.3.1 Research Approach 1.3.2 Sampling Procedure 1.3.3 Instrument 1.3.4 Data Collection 1.3.5 Data Analysis 1.4 Limitations 1.5 Significance of the Study 1.6 Research Timeline 2.0 Literature Review 2.1 Capital Asset Pricing Model 2.2 The Sharpe Measure 2.3 Standard Deviation 2.4 The Treynor Measure 2.5 Beta Coefficient
III III IV 1 2 2 3 3 3 4 5 5 6 6 7 7 8 10 10 11 12
2.6 The Jensen Measure 2.7 Systematic Risk 2.8 Geometric Mean 2.9 Calculation of Geometric Mean 2.10 Portfolio 2.11 The Risk Free Rate 2.12 Capitalization Ratio 3.0 Analysis of Performance 3.1 Financial Performance 3.1.1 Sharpe Measure 3.1.2 Treynor Measure 3.1.3 Jensen Measure 3.2 Financial Characteristic 3.2.1 Debt Equity Ratio 3.2.2 Average Standard Deviation of Equity 3.2.3 Frequency Distribution of Beta 3.2.4 Average Total Assets 4.0 Summary and Discussion 5.0 Conclusion References Bibliography Appendix
13 15 16 17 17 18 18 19 19 19 19 20 21 21 22 23 24 26 28 29 30 32
II
List of tables
1. Sharpe Measure of MNC and DMC 2. Treynor Measure of MNC and DMC 3. Jensen Measure of MNC and DMC 4. Debt equity ratio of MNC and DMC 5. Average Standard Deviation of Equity of MNC and DMC 6. Frequency Distribution of Beta of MNC and DMC 7. Average Total Assets of MNC and DMC 8. Correlational Matrix of MNC and DMC 9. Financial Performance Comparison of MNC and DMC 10. Systematic Risk () Comparison of MNC and DMC 11. T-bill Rate Comparison of Bangladesh and U.S Government 19 19 20 21 22 23 24 25 26 26 27
List of Figure
1. Graph of Markowitz Portfolio Selection 2. Graph of Capital Market Line 3. Diagram of Debt equity ratio of MNC and DMC 7 9 22
III
Executive Summary
The pharmaceutical and chemical industry is known as the fastest growing industry in Bangladesh. At the side of multinational, domestic corporations have been improved range and quality of their product. Multinational corporations (MNC) have established domineering presence with advanced technological, financial and administrative base over domestic corporations (DMC) in pharmaceutical and chemical industry. On the other hand, domestic corporations have production cost advantage over multinationals operating in developed countries. This research intends to evaluate systematically the differences of financial characteristics and performance between multinational and domestic corporations utilizing risk-adjusted performance measuring tools on the pharmaceutical and chemical industry in Bangladesh. The risk-adjusted performance measuring tools are Sharpe, Treynor, Jensen measure and debt equity ratio, average standard deviation of equity, frequency distribution of beta and average total assets are used to define financial characteristic. The origin of the sample list is the Dhaka Stock exchanges industry wise company list. Secondary data like: DSE general index, risk free rate, stock price etc. have been used for the research. The researcher employed t-test to find out the significant difference of financial characteristics and performance of two groups. The researcher also employed correlation and regression analyses to explore any existing relationship between the size and financial performance tools in context of Bangladesh. The result shows MNCs are more risk-adjusted with lower returns and DMCs are less risk-adjusted with higher returns. The report will help investors for better understanding the nature of MNCs and DMCs for investment in pharmaceutical and chemical industry in Bangladesh. Few unusual findings are observed and those would be issues for future research.
IV
1.0 Introduction
Pharmaceutical and chemical Industry has grown in Bangladesh in the last two decades at a significant rate. The national companies account for more than 65% of the pharmaceutical and chemical business in Bangladesh (www.pharmabiz.com). Following the Drug (Control) Ordinance of 1982, some of the local pharmaceutical companies improved range and quality of their products considerably. Square, Beximco, Acme, Incepta, Opsonin, ACI, General Pharma, Ibn Sina are quite strong and enjoying good market share. Square currently is the number one company in the industry and enjoys over 12% market share. (www.pharmabiz.com). However, among the top 20 companies of Bangladesh six are multinationals including GlaxoSmithKline, Sanofi-aventis, Reckitt Benckiser and Novartis. Almost all the life saving imported products and new innovative molecules are channeled-into and marketed in Bangladesh through these multinational companies. According to major economic indicator (2007), the export of pharmaceutical and chemicals rose to US$ 123.47 million in 2005-06 financial years while it was US$106.31 million in 2004-05 financial years. The country can expand its economic growth by investing in their fast growing pharmaceutical and chemical industry which has an annual average growth rate of 16% and a market size of BDT 30 billion in 2005 according to International Management System (IMS). In Bangladesh, the production cost of drugs is much lower than that of large MNCs operating in developed countries. This will give the local products a price advantage in developed markets as well. On the other hand the multinationals are taking the advantages of insufficient infrastructures, technological, financial and administrative base over domestic corporations of pharmaceutical and chemical industry. Bangladeshs rapid expansion in pharmaceuticals and chemicals was accompanied by huge investments mainly locally (Firdousi, 2005). Limited foreign investments flowed in through the setup of various multinational
Financial Performance & Characteristics of Pharmaceutical & Chemical Industry in Bangladesh: MNC vs. DMC
pharmaceutical and chemical companies (MNCs) that have established a domineering presence in the local market today. At present, the multinationals have a market share of 15% (Hossain, 2003). This is a favorable trend for Bangladesh since the multinationals have not capitalized on the local market but have just enough influence to transfer their technology and hire national employees creating jobs. The establishment of the multinationals is prospective for Bangladesh. It gives the local companies the opportunity to create partnerships and mergers with the MNCs. Since the local companies can produce drugs at a cheaper rate due to low production costs, the MNCs can outsource their export drug production to the local companies. This is an option that Bangladesh should consider in order to maximize its growth potential. Therefore, the multinational and domestic or national pharmaceuticals and chemical companies performances are playing different role for the economy of Bangladesh. As a result, it is important how multinational corporations (MNCs) and domestic or national corporations (DMCs) are performing and differs from each other. 1.2 Purpose of the study The main purpose of this study is to evaluate systematically the differences of financial characteristics and performance between multinational and domestic corporations utilizing risk-adjusted performance measuring tools on the pharmaceutical and chemical industry in Bangladesh. 1.2 Problem Statement According to Michel and Shaked (1986), if markets are not perfectly integrated, the multinational corporations are performing a valuable function for investors. It has been frequently argued that imperfections in the market for products translate into opportunities for MNCs. For example, Hirsch (1979) suggested a cost saving that permits an increase in the export of intermediate products as well as entry to markets of new products sharing production economies,
this incremental value of being able to arbitrage tax regimes (Agmon & Lessard, 1977). But the most frequently cited disadvantage of MNCs is that they operate in a more complex environment than their counterparts, DMCs. MNCs are always exposed to the criticism that they siphon funds out of countries in which they do business. So, governments are liable to limit the companys freedom to repatriate any of its profits. The performances of MNCs and DMCs were compared by Gughes, Louge and Sweeney (1975) through various risk measures, such as systematic () risk and unsystematic risk to find out whether MNC provides substantial diversification benefits. Previous research conducted by Michel and Shaked (1986) compared standard MNCs and DMCs performances through performance measures such as Sharpe, Treynor and Jensen measures. Therefore, the researcher intends to investigate the differences of financial characteristics and performance between multinational corporations (MNCs) and domestic corporations (DMCs) in context of pharmaceutical and chemical industry in Bangladesh. 1.3 Methodology 1.3.1 Research approach Here in this study two portfolios group were formed. One was for MNCs and another was for DMCs. After that portfolios performances were compared. 1.3.2 Sampling Procedure As the previous research conducted by Michel and Shaked (1986) included only publicly held company, so the researcher followed the procedure for the sampling. It facilitates of accounting data accesses which is most reasonable and standardized information. The genesis of the sample was the Dhaka Stock Exchange (DSE) industry-wise company list. There were total 25 pharmaceutical and chemical companies listed. There were other large MNCs operating in Bangladesh, but they were not enlisted in DSE. Those companies are registered and operating in
more than one country is selected as sample for multinational companies. As only two multinational companies (GlaxoSmithKline, Reckitt Benckiser) were there, so they were selected. According to market share position of year 2006 top three DMCs were selected. They are Square (15.01%), Beximco (10.28%) and ACI (3.31%). 1.3.3 Instrument In this study the researcher tries to measure financial performance of MNC and DMC portfolios through Sharp, Treynor and Jensen performance measurement tools and differentiate their characteristics through capitalization ratio (debt equity ratio), standard deviation of equity and frequency distribution beta. The measure tools are as follows:
Sharpe Measure, Where,
Si =
RiG - RfG
RiG = Geometric average return on stock i Rf G = Geometric average return on risk free Security i = Standard deviation of yearly rates of return
Treynor Measure,
RiG - RfG Ti = i
Where, RiG = Geometric average return on stock i RfG = Geometric average return on risk free security
i = Securitys beta
Jensen Measure, Where,
= RiG - [ RfG + i ( RmG - RfG )]
RiG = Geometric average return on stock i RfG = Geometric average return on risk free security i = Securitys beta RmG = Geometric average market return
1.3.4 Data collection For completing the study, secondary data were utilized. For secondary data collection: companies annual reports, daily trading price of stock and DSE general index, Dhaka stock exchanges library was used. The risk free rate (Rf), estimated by the monthly T-bill returns was obtained from Bangladesh Banks website and online published report, like: Major Economic indicator. Dhaka stock exchanges web site was also used to collect companies yearly performance data. 1.3.5 Data analysis For data analysis, the researcher adopted t-test to find out the significant differences of risk-adjusted performances and financial characteristics of the two groups, MNCs and DMCs. Financial characteristics of MNC and DMC portfolios were evaluated by some selected variables like capitalization ratio (debt equity ratio), standard deviation of equity and frequency distribution of beta. To find out whether average performance measures are influenced only because of their size or not, regression analysis was performed. For regression analysis, performance measure used as the dependent variable, size as independent variable. Other calculations like: standard
deviation, stock returns etc. Microsoft Excel was used. SPSS version 12 was used for statistical analysis 1.4 Limitations Pharmaceutical and chemical industry is so oversaturated and the number of market players is so intense that it limits the opportunity to work extensively on the proposed research subject during the internship period. The limitations confronted while conducting the research were: Availability of data was limited for which data of only six years has been incorporated. There are good numbers of multinational and domestic pharmaceutical and chemical companies are not listed under DSE but those are also key players in the market. Exclusion of those companies for the study can be attributed not to reflect the real differences between them. The proposed model of Michel and Shaked (1986) was measured on basis of monthly return, but unavailability data of dividend and DSE general index on monthly or quarterly this research study moved to the yearly return. Only three DMCs are included for DMCs portfolio and equal weight method was used for portfolio of both groups, which could be a limitation. 1.5 Significance of the study The present research is remarkable in various aspects. First of all, it will help investors to identify the nature of MNCs and DMCs and will also help to take decision regarding investment. Secondly, future researcher would be able to extent the research by including other indicator. Further more, for government or authorized department like Drug administration, Board of Investment etc. it facilitate better understanding of the potentiality of the pharmaceutical and chemical industry to contribute in development of an economy of a country like Bangladesh.
1.6 Research Timeline 2008 March 2008 April 2008 April 2008 April 2008 April 2008 May Writing Research Proposal Developing Literature Review Developing financial model Collecting pertinent data Analyzing data and interpret findings Preparing draft and finalize research paper
2.0 Literature Review

Any discussion of the theory of stock price behavior has to start with Markowitz (1952, 1959). The Markowitz model is a single-period model, where an investor forms a portfolio at the beginning of the period. The investor's objective is to maximize the portfolio's expected return, subject to an acceptable level of risk (or minimize risk, subject to an acceptable expected return). The assumption of a single time period, coupled with assumptions about the investor's attitude toward risk, allows risk to be measured by the variance (or standard deviation) of the portfolio's return. Thus, as indicated by the arrow in Figure 1, the investor is trying to go as far northwest as possible.
Figure 1: Markowitz Portfolio Selection
As securities are added to a portfolio, the expected return and standard deviation change in very specific ways, based on the way in which the added securities co-vary with the other securities in the portfolio. The best that an investor can do (i.e., the furthest northwest a portfolio can be) is bounded by a curve that is the upper half of a hyperbola, as shown in Figure 1. This curve is known as the efficient frontier. According to the Markowitz model, investors select portfolios along this curve, according to their tolerance for risk. An investor who can live with a lot of risk might choose portfolio A, while a more risk-averse investor would be more likely to choose portfolio B. One of the major insights of the Markowitz model is that it is a security's expected return, coupled with how it co-varies with other securities, that determines how it is added to investor portfolios (http://www.dfaus.com/library/articles/explaining_stock_returns). 2.1 Capital Asset Pricing Model Building on the Markowitz framework, Sharpe (1964), Lintner (1965) and Mossin (1966) independently developed what has come to be known as the Capital Asset Pricing Model (CAPM). This model assumes that investors use the logic of Markowitz in forming portfolios. It further assumes that there is an asset (the risk-free asset) that has a certain return. With a risk-free asset, the efficient frontier in Figure 1 is no longer the best that investors can do. The straight line in Figure 2, which has the risk-free rate as its intercept and is tangent to the efficient frontier, is now the northwest boundary of the investment opportunity set. Investors choose portfolios along this line (the capital market line), which shows combinations of the risk-free asset and the risky portfolio M. In order for markets to be in equilibrium (quantity supplied = quantity demanded), the portfolio M must be the market portfolio of all risky assets. So, all investors combine the market portfolio and the risk-free asset, and the only risk that investors are paid for bearing is the risk associated with the market portfolio. This leads to the CAPM equation:
CAPM equation: E(Rj) = Rf + j [E(Rm) - Rf] E(Rj) and E(Rm) are the expected returns to asset j and the market portfolio, respectively, Rf is the risk free rate, and j is the beta coefficient for asset j. j measures the tendency of asset j to covary with the market portfolio. It represents the part of the asset's risk that cannot be diversified away, and this is the risk that investors are compensated for bearing. The CAPM equation says that the expected return of any risky asset is a linear function of its tendency to co-vary with the market portfolio. So, if the CAPM is an accurate description of the way assets are priced, this positive linear relation should be observed when average portfolio returns are compared to portfolio betas. Further, when beta is included as an explanatory variable, no other variable should be able to explain cross-sectional differences in average returns. Beta should be all that matters in a CAPM world.
Figure 2: Capital Market Line Based on the capital market theory and recognizing the necessity to incorporate return and risk into the analysis, three researchers William Sharpe, Jack Treynor, and Michael Jensen developed measures of portfolio performance in the 1960s. These measures are often referred as
10
the composite (risk-adjusted) measures of portfolio performance, meaning they incorporate both realized return and risk into the evaluation (Jones, 2004). 2.2 The Sharpe Measure William Sharpe, introduce a risk-adjusted measure of portfolio performance called the rewardto-variability ratio (RVAR) based on his work in capital market theory, dealing specially with the capital market line (CML). The Sharpe portfolio performance measure (designated by S) is stated as follows: Sharpe Measure, Where, Ri = Average return on stock i Rf = Average return on risk free Security i = Standard deviation of monthly/yearly rates of return Shapes measure divides average portfolio excess return (or the return above the risk free rate) over the sample provided by the standard deviation of returns over that period (Shapre, 1966). In other words it seeks to measure the total risk of portfolio by including the standard deviation of returns. The Sharpe ratio is used to measure how well the return if an asset compensates the investor for the risk taken. When comparing tow assets each with the average return against the same benchmark with return Rf , the asset with higher Sharpe ratio gives more return for the same risk. 2.3 Standard Deviation Standard deviation () is the statistical measure of the degree to which an individual value in a probability distribution tends to vary from the mean of the distribution. In finance, standard deviation is a representation of the risk associated with a given security (stock, bonds, property, etc.) or the risk of a portfolio of securities. Risk is an important factor in
Si =
Ri - Rf
i
11
determining how to efficiently manage a portfolio if investments because it determines the variations in returns on the assets and/or portfolio and gives investors a mathematical basis for investment decisions. The overall concept of risk is that as it increases, the expected return on the asset will increase as a result of the risk premium earned - in other words, investors should expect a higher return on an investment when said investment carries a higher level of risk. As this study is on historical data of stocks so, historical returns has been calculated and then standard deviation or the returns has been calculated. 2.4 The Treynor Measure At approximately the same time as Sharpes measure was developed (the mid 1960s), Jack Treynor presented a similar measure called the reward-to-volatility ratio (RVOL). Like Sharpe, Treynor sought to relate the return on a portfolio to its risk. Treynor, however, distinguished between total risk and systematic risk. He used as a benchmark the ex-post security line. Treynors measure relates the average excess return on the portfolio during some period to its systematic risk as measured by the portfolios beta. The Treynor portfolio performance measure (designated T) is stated as follows:
Ri - Rf
Treynor Measure, Where, Ri = Average return on stock i Rf = Average return on risk free security
Ti =
i = Securitys beta
In measuring portfolio performance Treynor introduce the concept of the characteristic line, which uses to partition a securitys return into its systematic and no systematic components. The
12
slope of the characteristic line measures the relative volatility of the funds returns. As we know, the slope of this line is the beat coefficient, which is a measure of the volatility of the portfolios returns in the relation to those of the market index (Treynor, 1965). A larger T value indicates a larger slope and a better portfolio for all investors, regardless of their risk preferences. Because the numerator of this ratio ( Ri - Rf ) is the risk premium and the denominator is a measure of risk, the total express indicates the portfolios risk premium return per unit of the risk. All riskaverse investors would prefer to maximize this value. 2.5 Beta Coefficient The beta coefficient () measures an investment's relative volatility or impact of a per-unit change in the independent variable (market) on the dependable variable (portfolio) holding all else constant. The Beta coefficient, in terms of finance and investing, is a measure of volatility of a stock or portfolio in relation to the rest of the financial market (http://en.wikipedia.org/wiki/Beta_%finince%29). An asset with a beta of 0 means that its price is not at all correlated with the market; that asset is independent. A positive beta means that the asset generally follows the market. A negative beta shows that the asset inversely follows the market; the asset generally decreases in value if the market goes up. By definition, the market itself has an underlying beta of 1.0, and individual stocks are ranked according to how much they deviate from the macro market (for simplicity purposes, the DSE general index is usually used as a proxy for the market as a whole). A stock that swings more than the market (i.e. more volatile) over time has a beta above 1.0. If a stock moves less than the market, the stock's beta is less than 1.0. More specifically, a stock that has a beta of 2 follows the market in an overall decline or growth, but does so by a factor of 2; meaning when the market has an overall decline of 3% a stock with a beta of 2 will fall 6%. (Betas can also be negative, meaning the stock moves in the
13
opposite direction of the market: a stock with a beta of -3 would decline 9% when the market goes up 3% and conversely would climb 9% if the market fell by 3 %.) The beta coefficient is a key parameter in the capital asset pricing model (CAPM). It measures the part of the asset's statistical variance that cannot be mitigated by the diversification provided by the portfolio of many risky assets, because it is correlated with the return of the other assets that are in the portfolio. Higher-beta stocks mean greater volatility and are therefore considered to be riskier, but are in turn supposed to provide a potential for higher returns; lowbeta stocks pose less risk but also lower returns. In the same way a stock's beta shows its relation to market shifts, it also is used as an indicator for required returns on investment (ROI). The beta movement should be distinguished from the actual returns of the stocks. For example a sector may be performing well and may have good prospects, but the fact that its movement does not correlate well with the broader market index may decrease its beta. However, it should not be taken as a reflection on the overall attractiveness or the loss of it for the sector, or stock as the case may be. Beta is a measure of risk and not to be confused with the attractiveness of the investment. 2.6 The Jensen Measure The measure was first used in the evaluation of mutual fund managers by Michael Jensen in the 1970s. In finance, Jensens alpha or Jensens measure is used to determine the excess return of a stock, other security, or portfolio over the securitys required rate of return as determined by the Capital Asset Pricing Model. This model is used to adjust for the level of beta risk, so that riskier securities are expected to have higher returns. (http://en.wikipedia.org/wiki/Jensen_ratio).
14
Ri
= Rf + i [ Rm - Rf ]
Ri = Average return on stock i Rf = Average return on risk free security i = Securitys beta Rm = Average market return
This equation indicate that the realized rate of return on a security or portfolio should be a linear function of the risk free rate of return, plus a risk premium that depends on the systematic risk of the security. By subtracting risk free return from both sides we get following equation:
Ri - Rf
Where,
= i [ Rm - Rf ]
Ri - Rf
= The risk premium on the stock i
In this form, it would not be expected any interception for the regression if all assets and portfolio were in equilibrium. Alternatively, certain superior portfolio managers who could forecast market turns or consistently select under valued securities would earn higher risk premiums than those implied by this model. To detect and measure this superior and/ or inferior performance Jensen agreed to add an intercept (a non-zero constant) term (alpha) that measures any positive and/or negative differences from the model. Consistent positive difference would case a positive intercept, whereas consistent negative differences cause a negative intercept. So with an intercept the earlier equation becomes:
Ri - Rf
= i + i [ Rm - Rf ]
Superior performances will evident by significantly positive alpha and inferior performances will evident by significantly negative alpha. If alpha is insignificantly different from zero, this
15
evidence that the portfolio manager matched the market on a risk-adjusted basis. Now to better demonstrate what i (alpha) is, the above equation can be rearrange like bellow:
i = (Ri - Rf ) {i [ Rm - Rf ]}
So finally the equation becomes as bellow:
= Ri - [ Rf + i ( Rm - Rf )]
A computable advantage of the Jensen measure is that it permits the performance measure to be estimated simultaneously with the beta for a portfolio. That is by estimating a characteristic line in risk premium form, estimates of both alpha and beta are obtained at same time (Jones, 2004). A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%. However, unlike the Sharpe and Treynor measures, each periods returns must be used in estimating process rather than an average return for the entire period. Thus, if performance is being measured on an annual return on Rf, Rm and Ri must be obtained. 2.7 Systematic risk Systematic risk is a risk that cannot be diversified away, as opposed to "idiosyncratic risk, which is specific to individual stocks (http://en.wikipedia.org/wiki/Systemic_risk). It also called market risk or undiversified risk. It refers to the movements of the whole economy. Even if we have a perfectly diversified portfolio there is some risk that we cannot avoid and this is the systematic risk. However, the systematic risk is not the same for all securities or portfolios. Different companies respond differently to a recession or a booming economy. For an example think of the automobile industry compared to the food industry in case of a recession. Both of them will be affected negatively but food industry not as much as automobile industry.
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2.8 Geometric Mean Measuring the investment return generally arithmetic average is used but the pervious study used geometric average. Though, the geometric average always gives lower value than arithmetic average. The geometric average is used because the effect of the negative returns of a stock is fully offsets by its calculation, which is not true for the arithmetic average. In general, the bad returns have the grater influences on the averaging process in the geometric technique. So geometric average will be appropriate for this study and finally the measure tools will be as follows: Sharpe Measure, Where, RiG = Geometric average return on stock i Rf G = Geometric average return on risk free Security i = Standard deviation of monthly/yearly rates of return
Si =
RiG - RfG
Treynor Measure, Where, RiG = Geometric average return on stock i
Ti =
RiG - RfG i
RfG = Geometric average return on risk free security
i = Securitys beta
= RiG - [ RfG + i ( RmG - RfG )]
RiG = Geometric average return on stock i RfG = Geometric average return on risk free security
17
i = Securitys beta RmG = Geometric average market return

2.9 Calculation of geometric mean The geometric mean, in mathematics, is a type of mean or average, which indicates the central tendency or typical value of a set of numbers. It is similar to the arithmetic mean, which is what most people think of with the word "average," except that instead of adding the set of numbers and then dividing the sum by the count of numbers in the set, n, the numbers are multiplied and then the nth root of the resulting product is taken (http://en.wikipedia.org/wiki/Geometric_mean). But it is very obvious that returns of stock can be negative or zero. So to calculate the geometric mean along with the negative return, it requires that the negative values be converted or transformed to a meaningful positive equivalent value. For example, to calculate the geometric mean of the values +12%, -8%, and +2%, instead calculate the geometric mean of their decimal multiplier equivalents of 1.12, 0.92, and 1.02, to compute a geometric mean of 1.0167. Subtracting 1 from this value gives the geometric mean of +1.67% as a net rate of population growth (or financial return). 2.10 Portfolio Portfolio means a combination of different securities with different returns and standard deviations, which actually minimize the risk and maximize the return. Holding a portfolio is a part of an investment and risk-limiting strategy called diversification (Investmentpedia.com). The assets in the portfolio could include stocks, bonds, options, warrants, gold certificates, future contracts or any other that is expected to retain its value.
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2.11 The risk-free rate The risk-free rate is the current interest rate on a default-free bond in the absence of inflation. The risk-free interest rate is the interest rate that it is assumed can be obtained by investing in financial instruments with no default risk. However, the financial instrument can carry other types of risk, e.g. market risk (the risk of changes in market interest rates), liquidity risk (the risk of being unable to sell the instrument for cash at short notice without significant costs) etc. Though a truly risk-free asset exists only in theory, in practice most professionals and academics use shortdated government bonds of the currency in question. Usually government Treasury bills are used for investment. The risk-free interest rate is thus of significant importance to modern portfolio theory in general, and is an important assumption for rational pricing. It is also a required input in financial calculations, such as the Sharpe, Treynor, and Jensen formula for measuring volatility of portfolio. Note that some finance and economic theory assumes that market participants can borrow at the risk free rate; in practice, of course, very few borrowers have access to finance at the risk free rate. 2.12 Capitalization Capitalization is a measure of a corporation's reliance on long-term debt. These ratios compare debt to shareholders' equity and thus reflect the extent to which a corporation is trading on its equity. This ratio is calculated by dividing debt by shareholders' equity. It also called debt to equity ratio (www.investmentpedia.com/finance/cap_ratio).
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3.0 Analysis of Performance

3.1 Financial Performance The measures of financial performance are exhibited by three tables for the both MNC and DMC portfolios. Several observations are promptly noticeable. 3.1.1 Sharpe Measure Table 1 Sharpe Measure of MNC and DMC Sharpe Measure MNCs DMCs 2000-2002 3.92 10.64 2001-2003 3.20 3.33 2002-2004 4.93 2.45 2003-2005 4.11 32.79 2004-2006 1.81 9.14
The table 1 is presenting Sharpe measure of MNC and DMC portfolio, where DMC portfolio is higher than MNC portfolio almost each of the five time periods. Therefore DMC portfolio is obtaining higher return than MNC portfolio. In other word, DMC portfolio is compensating in a good way of the risk taken by the investors. 3.1.2 Treynor Measure Table 2 Treynor Measure of MNC and DMC Treynor Measure MNCs DMCs 2000-2002 0.76 -2.76 2001-2003 0.89 -1.02 2002-2004 2.74 -2.16 2003-2005 2.5 12.10 2004-2006 4.38 17.21
Treynor measure is demonstrated by Table 2. All the risk-averse investors would prefer to maximize the Treynor value. But the denominator () of the Treynor equation measures the volatility of the portfolio in relation to the rest of the market. The T value of the DMC portfolio is greater than the MNC portfolio almost over each of the five time periods. Though, the T values of
20
the DMC portfolio are greater than the MNC, the DMC portfolio is inversely correlated to the rest of the market. The beta of the DMC portfolio is negative over 2000 to 2004 time periods. Therefore, the DMC portfolio is much more volatile than the MNC portfolio, hence they are considered more risky than the MNC portfolio. Some of that high return can be explained by their higher volatility. 3.1.3 Jensen Measure In table 3 Jensen measure of MNC and DMC portfolio is displayed. Here in Jensen measure the value of DMC portfolio is superior to MNC portfolio almost over the each time periods. As the Jensen model adjust the level of risk for the level of beta and thats why the riskier portfolios are expected to have higher excess returns. Therefore, DMC portfolio is riskier as well as giving higher excess returns. Table 3 Jensen Measure of MNC and DMC Jensen Measure MNCs DMCs 2000-2002 2.94 6.04 2001-2003 2.71 5.26 2002-2004 2.55 4.81 2003-2005 2.50 3.35 2004-2006 3.54 3.55
The previous researchers Michel and Shaked (1986) conclude that domestic corporations (DMC) performances have a superior risk-adjusted performance. While Hughes, Logue and Sweeney (1975) showed that multinational corporations (MNC) performances are more riskadjusted with higher return than domestic corporations (DMC). Interestingly, this study reveals that domestic corporations (DMC) are less risk-adjusted with higher returns whereas multinational corporations (MNC) are more risk-adjusted with lower returns. T-test is performed separately for each performance measure. The result does not show any significant differences
21
between the groups for both Sharpe and Jensen measure. The result of t-test of Treynor measurement of the two samples significantly differs at a level of p < 0.001. 3.2 Financial Characteristic The Financial characteristic of two groups is presented by four tables. The selected variables for the financial characteristic are debt equity ratio as a capitalization ratio, average standard deviation of equity, frequency distribution of beta and average total asset. 3.2.1 Debt equity ratio Table 4 Debt equity ratio of MNC and DMC 2006 MNCs DMCs 0.115 0.221 2005 0.085 0.303 2004 0.095 0.323 2003 0.115 0.254 2002 0.115 0.095 2001 0.120 0.125 2000 0.095 0.135
The table 4 is demonstrating debt equity ratio of MNC and DMC portfolios. The previous study demonstrates that MNCs are highly leveraged than DMCs. But the present study finds out that DMCs are more leveraged rather than MNCs. The higher debt equity ratio of DMCs reflects the higher borrowed fund in the capital structure. This might be an explanation of the higher volatility of DMCs portfolio than MNCs. Further more, MNC can reduce the total risk: operational and financial risk, by diversifying internationally at the corporate level. The range of the debt equity ratio of MNC is 0.085 to 0.12, whereas the range of DMC is 0.095 to 0.303. Result of the t-test indicates that the debt equity ratio of the two samples significantly differs at a level of p < 0.001.
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Figure 3: Debt equity ratio 3.2.2 Average Standard Deviation of Equity Table 5 Average Standard Deviation of Equity of MNC and DMC 2000-2002 MNCs DMCs 0.005 0.986 2001-2003 0.010 0.290 2002-2004 0.070 0.531 2003-2005 0.070 1.214 2004-2006 0.02 1.625
The above table provides the average standard deviation of equity for the two groups. As indicated by the results, the average standard deviation of equity of the DMCs is consistently higher than MNCs. A t-test was performed which indicate the average standard deviation of the two samples are significantly differs at a level of p < 0.05. The lower equity-variability reported for the MNC portfolio is consistent with the theoretical hypothesis on total risk reduction. The result of the standard deviation of equity of the present study similar with the empirical findings reported by Hughes et al. (1975) as well as with the previous research reported by Michel and Shaked (1986).
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3.2.3 Frequency Distribution of Beta Table 6 Frequency Distribution of Beta of MNC and DMC Range -4 -2 -1 1 3 2 4 -3 -1 0 MNC 0.20 0.40 0.40 2.05 DMC 0.20 0.40 0.40 -1.69
Mean beta
The table 6 is presenting the frequency distribution of beta. After frequency distribution of betas of the two portfolios, it reveals that 60 percent of DMC portfolios beta is under negative range and 80 percent of MNC portfolios beta is under positive range. Furthermore the mean of betas of MNC and DMC portfolios are respectively 2.05 and -1.69. The results are clearly suggestive. As most of the values of beta of MNC portfolio falls under positive range and close to markets beta, they should have lower systematic risk. On the other hand most of the value of beta of DMC portfolio falls under negative range; they should have higher systematic risk. This might be one of the explanations of low returns for MNCs and high returns for DMCs. The result of lower systematic risk of MNC is also supported by Hughes et al (1975), Rugman (1977) and Agmon and Lessard (1977).
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3.2.4 Average Total Assets Table 7 Average Total Assets of MNC and DMC 2000-2002 MNCs DMCs *million in TK By using asset as a variable the size of the portfolios is measured. The above table indicates the average size of multinational corporations (MNC) is higher compared to the domestic corporations (DMC). As a consequence it is necessary to test whether average performance measures of the two groups differ because of the size effect. Miller and Pras (1979) reported through regression result that size is a significant explanatory variable for performances. The pervious study conducted by Michel and Shaked (1986) reported that size is not a significant variable in any case as well as for observed differences in the two groups performance. Similarly, the present study reveals the size can not explain observed differences in the two groups performance. A correlation analysis has been conducted on all the performance tools and size as variables to explore the relationship among variables. For interpreting the strength of relationships among variables, the guideline suggested by Rowntree (1981) has been followed; and the classification of the correlation coefficient (r) is as follows: 6131.33 4661.64 2001-2003 6562.16 4254.13 2002-2004 6871.00 4828.00 2003-2005 7448.87 5807.56 2004-2006 7853.94 6827.74
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0.0 0.2 0.4 0.7 0.9
to to to to to
0.2 0.4 0.7 0.9 1.0
Very weak, negligible Weak, low Moderate Strong, high marked Very strong, very high
The bi-variate correlation procedure was a subject to a two tailed test of statistical significance at two different levels highly significant (p<. 001) and significant (p<. 01) or (p<.05). The results of the correlational analysis are shown in Table 8. The result shows that size has a moderate correlation but not significantly. Table 8 Correlational Matrix for Sharpe, Treynor, Jensen Measure and Size of MNC and DMC
Correlations Sharpe Sharpe Pearson Correlation Sig. (2-tailed) N Treynor Pearson Correlation Sig. (2-tailed) N Jensen Pearson Correlation Sig. (2-tailed) N size Pearson Correlation Sig. (2-tailed) N 1 . 10 .536 .110 10 -.220 .541 10 .537 .110 10 Treynor .536 .110 10 1 . 10 .046 .899 10 .437 .207 10 Jensen -.220 .541 10 .046 .899 10 1 . 10 -.306 .390 10 size .537 .110 10 .437 .207 10 -.306 .390 10 1 . 10
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4.0 Summary and Discussion

For better understanding of MNC and DMC portfolios performances the researcher have to compare the return of measures. The comparison is given bellow: Table 9 Financial Performance Comparison of MNC and DMC Measurement Tool Sharpe Measure Treynor Measure Jensen Measure MNC (GOOD) DMC (GOOD)
The above table shows that returns of all measure of DMC portfolio are better than MNC portfolio. Therefore DMC portfolio could be considered as attractive option if we disregard of risk factor. The following table illustrates the riskiness of the portfolios. As the result of frequency distribution of beta shows that the DMC portfolio is more risky than MNC portfolio. Table 10 Systematic Risk () Comparison of MNC and DMC Less Risky MNC DMC More Risky
It is obvious that the results and findings of the study could be momentary and even an incident. According to Hassan, Islam and Basher (2000), the Dhaka Stock exchange is an inefficient capital market. The present study collected the trade prices of stocks from DSE.
27
Therefore it would not be sensible to recommend which portfolio would be attractive or risky between MNC and DMC portfolios. Moreover, the study observed a few negative betas of DMC portfolio, which is unusual for the pharmaceutical and chemical industry. May be over short periods luck can over shadowed all else, but luck can not be expected to continue. Table 11 T-bill Rate Comparison of Bangladesh and U.S Government Month November 07 December 07 January 08 February 08 March 08 Bangladesh T-bill Rate 7.30 7.33 7.29 7.35 7.33 U.S T-bill Rate 4.48 3.98 3.74 2.70 2.23
Source: http://www.federalreserve.gov/releases/H15/data/Business_day/H15_NFCP_M1.txt
http://www.bangladesh-bank.org/selectedecooind/magecoind.pdf
T-bill rates of Bangladesh are much higher than any other country. It is almost double than U.S. Hence is Bangladesh government discouraging investment? Or is there no strong coordination between policy-makers and other related department? Most of the multinational corporations as well as better performed domestic corporations are not listed under Dhaka Stock Exchange. But those companies are also key players in the market. Therefore are MNCs making profit here and drain it outside of the country? Is Bangladesh government thoughtless about the unlisted companies on encouraging and imposing rules to be listed under DSE? How much DSE is inefficient and trustworthy of DSE data? Will the investment decision be reliable and profitable based on DSE data?
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5.0 Conclusion
A serious study is necessary on the issue of higher interest payment for T-bill by Bangladesh government. It is also necessary to check, whether any substantial diminish in investment for the higher T-bill rate. Bangladesh Bank, Board of Investment, Security Exchange Commission (SEC) and other related department should have strong coordination for both policy-making and imposing. Without proper coordination among the departments it is not possible to come up with the best solution. Bangladesh government should be caring for the growing domestic pharmaceutical and chemical companies. In addition, government is liable to limit the multinational companies freedom to repatriate of its profits. Furthermore, government should encourage and facilitate those unlisted companies to be listed under DSE. SEC should take bold steps to make an efficient capital market in Bangladesh as soon as possible. However, Rome was not built in a day.
29
References
Annual report (2000-2006): Advance Chemical Industry. Annual report (2000-2006): Beximco Pharmaceutical Ltd. Annual report (2000-2006): GlaxoSmithKline Bd. Ltd. Annual report (2000-2006): Reckitt Benckiser Bd. Ltd. Annual report (2000-2006): Square Pharmaceutical Ltd. Alexander, G.J., Bailey, J.V. & Sharpe, W.F. (2003). Investment (6th ed.). Prentice Hall India: India. Beta coefficient Retrieved from http://en.wikipedia.org/wiki/Beta_%finince%29 Bodie, Z., Kane,A. & Marcus, A.J. (2003). Investments (5th ed.). McGraw-Hill: New Delhi. Dhaka stock exchanges industry wise company list. Retrieved from: http://www.dsebd.org/industrylisting.php Jensens Alpha Retrieved from http://en.wikipedia.org/wiki/Jensen_ratio Jones, C.P. (2004). Investment analysis and management. (9th ed.) John Wiley & Sons Inc. Major Economic Indicator (March, 2008). Retrieved from: http://www.bangladesh-bank.org/selectedecooind/magecoind.pdf Rahman, H. The Growth of the Pharmaceutical Sector. Retrieved from: http://www.ais-dhaka.net/School_Library/Senior%20Projects/ 06_rahman_pharmaceuticals.pdf Sharp ratio Retrieved from http://en.wikipedia.org/wiki/Sharpe_ratio Standard deviation Retrieved from http://en.wikipedia.org/wiki/Standard_deviation Systemic risk Retrieved from http://en.wikipedia.org/wiki/Systemic_risk Treynor ratio Retrieved from http://en.wikipedia.org/wiki/Treynor_ratio
30
Bibliography
Ahmed, M. (2004). Effects of regulation on Pharmaceutical Market in Bangladesh. Retrieved from http://www.pharmadu.net/articlesdetail.php?art=2&pg=3 Bangla Pharma Waiting in the wings. (Thursday, January 27, 2005). Retrieved from http://www.pharmabiz.com/ Chronicle Specials /article/ detnews.asp? articleid=25947%sectionoid=50. Davis, J. L. (2001). Explaining Stock Returns: A Literature Survey. Retrieve from: http://www.dfaus.com/library/articles/explaining_stock_returns/ Grinblatt, M., & Titman, S. (1994). A Study of Monthly Mutual Fund Returns and Performance Evaluation Techniques. The Journal of Financial and Quantitative Analysis, 29 (3), 419444. Hassan, M.K., Islam, M.A. and Basher, S.A., (2000). Market efficiency, time-varying volatility and equity returns in Bangladesh stock market. Retrieve from: http://129.3.20.41/eps/fin/papers/0310/0310015.pdf Horowitz, I. (1966). The "Reward-to-Variability" Ratio and Mutual Fund Performance. The Journal of Business, 39 (4), 485-488. Hughes, J. S., D. E. Logue, & R. J. Sweeney. (1975). Corporate International Diversification and Market Assigned Measures of Risk and Diversification. Journal of Financial and Quantitative Analysis. 32 (1), 39 46 IMS Global Insights- An Eye on The World of Pharma. (2005). Retrieve from: http://www.ims-global.com/globalinsights.htm. Jensen, G. M. (1968). The performance of Mutual Funds in the Period 1945 -1964. Journal of Finance. 23 (2), 389 416. Litzenberger, R. H. (1991). William F. Sharpe's Contributions to Financial Economics. The Scandinavian Journal of Economics, 93 (1), 37-46. Miller, J. & Pras, R. (1979). The Effecls of Multinational and Lxport Diversification on the Profit Stability of U.S. Corporations. Southern Economic Review. 46 (1), 49-75. Rahman, A. (2005). Pharmaceutical Sector In A Crucial Phase. Retrieve from: http://www.pharmabiz.com/article/detnews.asp?articleid=25948&sectionoid=50 Reeb, D. M., Kwok, C. C. Y., & Baek, H. Y. (1998). Systematic Risk of the Multinational Corporation. Journal of International Business Studies, 29 (2), 263-279.
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Reilly, F.K. (2004). Investment analysis and portfolio management. (4th ed.). McGraw-Hill: San Francisco. Roll R. (1980). Performance Evaluation and Benchmark Errors (I). Journal of portfolio Management. 6 (4), 5-12. Shaked, I. (1986). Are Multinational Corporations Safer? Journal of International Business Studies, 17 (1), 83-106. Sharpe, W.F. (1966, January). Mutual fund performance. Journal of Business. 39 (1), 119-138. Treynor, J.L. (1965). How to rate management of investment funds. Journal of portfolio management. 43, 63-75.
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Appendix
33
Table 12 Excess Market Return Market Return Year 2000 2001 2002 2003 2004 2005 2006 (General Index Return) 0.184248835 0.272468414 0.005563776 0.176982757 1.03672976 -0.149119114 -0.040444749 T-bill return 0.037398374 0.064220183 0.170087977 0.017925736 0.0125 0.722772277 0.047142857 Excess Return (Rm Rf ) 0.146850461 0.20824823 -0.164524201 0.15905702 1.02422976 -0.871891391 -0.087587606
Table 13 Excess Return of DMC Portfolio Year 2000 2001 2002 2003 2004 2005 2006 DMC Portfolio Return 6.089387971 5.434761136 6.540355521 3.595000944 3.469296702 3.672785864 4.219940493 T-bill return 0.037398374 0.064220183 0.170087977 0.017925736 0.0125 0.722772277 0.047142857 Excess Return(Rp Rf ) 6.051989597 5.370540953 6.370267545 3.577075208 3.456796702 2.950013587 4.172797636
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Table 14 Excess Return of MNC Portfolio Year 2000 2001 2002 2003 2004 2005 2006 MNC Portfolio Return 3.358652766 4.149126249 2.524016865 2.677421892 3.585044134 2.359289362 6.155215181 T-bill return 0.037398374 0.064220183 0.170087977 0.017925736 0.0125 0.722772277 0.047142857 Excess Return(Rp Rf ) 3.321254392 4.084906065 2.353928889 2.659496155 3.572544134 1.636517085 6.108072324
35
Table 15 Geometric Mean calculation and Standard deviation of T-bill, Market return, MNC and DMC Portfolios return Portfolio return Of Portfolio return of Market Year MNC DMC T-bill Return Return 2000-2002 Geometric Mean 3.276458486 6.004153972 1.089093561 1.148593971 Standard Deviation 2001-2003 Geometric Mean Standard Deviation 2002-2004 Geometric Mean Standard Deviation 2003-2005 Geometric Mean Standard Deviation 2004-2006 Geometric Mean Standard Deviation 0.812654695 3.038005605 0.897257611 2.893573531 0.573453006 2.829203426 0.636063572 3.73398858 1.937236296 0.555914707 0.089093561 5.036864589 1.082236144 1.487849124 0.082236144 4.336911928 1.064412292 1.737925843 0.064412292 3.578041335 1.210913164 0.102680645 0.210913164 3.774398864 1.222389508 0.388212169 0.222389508 0.148593971 1.146240045 0.146240045 1.34082174 0.34082174 1.268208791 0.268208791 1.184742736 0.184742736
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Table 16 Beta of MNC Portfolio Excess Return of MNC (Rp - Rf) 3.321254392 4.084906065 2.353928889 4.084906065 2.353928889 2.659496155 2.353928889 2.659496155 3.572544134 2.659496155 3.572544134 1.636517085 3.572544134 1.636517085 6.108072324 Excess Return of Market (Rm - Rf) 0.146850461 0.20824823 -0.164524201 0.20824823 -0.164524201 0.15905702 -0.164524201 0.15905702 1.02422976 0.15905702 1.02422976 -0.871891391 1.02422976 -0.871891391 -0.087587606 0.800315558 1.020136446 1.031367015 3.308847697 Beta Of MNC (Slope) 4.144420355
Year 2000 2001 2002 2001 2002 2003 2002 2003 2004 2003 2004 2005 2004 2005 2006
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Table 17 Betas of DMC Portfolio Excess Return of DMC (Rp - Rf) 6.051989597 5.370540953 6.370267545 5.370540953 6.370267545 3.577075208 6.370267545 3.577075208 3.456796702 3.577075208 3.456796702 2.950013587 3.456796702 2.950013587 4.172797636 Excess Return of Market (Rm - Rf) 0.146850461 0.20824823 -0.164524201 0.20824823 -0.164524201 0.15905702 -0.164524201 0.15905702 1.02422976 0.15905702 1.02422976 -0.871891391 1.02422976 -0.871891391 -0.087587606 0.206349883 0.278051583 -1.972889166 -4.828729178 Beta Of DMC (Slope) -2.142885823
Year 2000 2001 2002 2001 2002 2003 2002 2003 2004 2003 2004 2005 2004 2005 2006
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Table 18 Result of the Measurement of MNC Portfolio Measurement Tool Sharpe Measure Treynor Measure Jensen Measure 2000-2002 2001-2003 2002-2004 2003-2005 2004-2006
3.92216392 3.294226121 4.933553766 4.116397131 1.812684946 0.769073755 2.940770216 0.89329269 2.74311782 2.566607902 4.387768096
2.7439903 2.544081651 2.559840905 3.541728369
Table 19 Result of the Measurement of DMC Portfolio Measurement Tool Sharpe measure Treynor Measure Jensen measure 2000-2002 10.6402301 -2.7603246 6.042563 2001-2003 3.33006107 -1.02607296 5.263685949 2002-2004 2003-2005 2004-2006 9.149660006 17.21352734 3.559777763
2.458390071 32.79223821 -2.165605504 12.10972486 4.817824843 3.351197032
Table 20 Debt equity ratio Of MNC and DMC portfolios Year 2006 2005 2004 2003 2002 2001 2000 DMC 0.221 0.303 0.323 0.254 0.095 0.125 0.135 MNC 0.115 0.085 0.095 0.115 0.115 0.120 0.095
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Table 21 Total assets of Companies 2006 ACI Beximco Square DMC Portfolio GSK Reckitt Benckiser MNC Portfolio 2915 11913 9299 7962 11096 5587 8342 2005 2674 10945 7908 7104 11728 3787 7758 2004 1978 8560 5877 5417 11038 3887 7463 2003 1675 8013 5164 4901 11119 3134 7127 2002 1334 6763 4526 4166 8955 3093 6024 2001 1028 6360 3811 3696 8460 4612 6536 2000 9913 5411 3234 6124 7987 3681 5834
Table 22 Average Total Assets of MNC and DMC Portfolios Year 2000-2002 2001-2003 2002-2004 2003-2005 2004-2006 MNC 6131.333333 6562.166667 6871.000 7448.876667 7853.943333 DMC 4661.644705 4254.139508 4828.002874 5807.560938 6827.747111
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T-Test
Group Statistics
Type Sharpe MNC DMC Treynor MNC DMC Jensen MNC DMC
N 5 5 5 5 5 5
Mean 3.5960 11.6700 2.2640 4.6560 72.9480 4.6020
Std. Deviation 1.17496 12.32964 1.49463 9.29188 157.11293 1.14218
Std. Error Mean .52546 5.51398 .66842 4.15545 70.26304 .51080
Independent Samples Test
Levene's Test for Equality of Variances

F Sig. t df
t-test for Equality of Means

Sig. (2tailed) Mean Differen ce Std. Error Difference 95% Confidence Interval of the Difference
Lower Sharpe Equal variances assumed Equal variances not assumed Equal variances assumed Equal variances not assumed Equal variances assumed Equal variances not assumed 4.537 .066 1.458 1.458 30.326 .001 -.568 8 .183 8.0740 0 8.0740 0 2.3920 0 2.3920 0 68.346 00 68.346 00 5.53896 20.846 87 23.345 05 12.097 67 13.854 54 93.685 13 126.73 249
Upper 4.6988 7 7.1970 5 7.3136 7 9.0705 4 230.37 713 263.42 449
4.073
.217
5.53896
Treynor
.585
4.20887
-.568
4.207
.599
4.20887
Jensen
6.995
.029
.973
.359
70.26489
.973
4.000
.386
70.26489
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Group Statistics
Debt to Equity Ratio
type MNC DMC
N 7 7
Mean .1058 .2081
Std. Deviation .01510 .09070
Std. Error Mean .00571 .03428
Independent Samples Test
Levene's Test for Equality of Variances
Sig.
df
t-test for Equality of Means Mean Sig. (2Differen Std. Error 95% Confidence Interval of tailed) ce Difference the Difference Lower Upper -.02659
Debt Equity Ratio
Equal variances assumed Equal variances not assumed
20. 482
.001
-2.944
12
.012
-.10231
.03476
-.17804
-2.944
6.333
.024
-.10231
.03476
-.18629
-.01834
Group Statistics
STDEV
type MNC DMC
N 5 5
Mean .0350 .9292
Std. Deviation .03240 .53283
Std. Error Mean .01449 .23829
42
Independent Samples Test Levene's Test for Equality of Variances
t-test for Equality of Means 95% Confidence Interval of the Difference
F STDEV Equal variance s assumed Equal variance s not assumed 10.893
Sig. .011
t -3.746
df 8
Sig. (2tailed) .006
Mean Differen ce -.89420
Std. Error Differen ce .23873
Lower 1.4447 1 1.5551 0
Upper -.34369
-3.746
4.030
.020
-.89420
.23873
-.23330
Regression
Variables Entered/Removed(b)
Variables Model 1 Entered size(a)
Variables Removed . Method Enter
a All requested variables entered. b Dependent Variable: Sharpe
Model Summary
Adjusted R Model 1 R .537(a) R Square .288 Square .199
Std. Error of the Estimate 8.31421
a Predictors: (Constant), size
43
ANOVA(b) Sum of Model 1 Regression Residual Total a Predictors: (Constant), size b Dependent Variable: Sharpe Squares 223.567 553.009 776.576 df 1 8 9 Mean Square 223.567 69.126 F 3.234 Sig. .110(a)
Coefficients(a)
Model B 1 (Constant) size
Unstandardized Coefficients Std. Error 4.126 .001
Standardized Coefficients Beta
Sig.
1.916 .002
.464 .537 1.798
.655 .110
a Dependent Variable: Sharpe
Regression
Variables Model 1 Entered size(a)
Variables Removed . Method Enter
a All requested variables entered. b Dependent Variable: Treynor
44
Model Summary
Model 1
R .437(a)
R Square .191
Adjusted R Square .090
ANOVA(b)
Model 1
Sum of Squares Regression Residual Total 70.390 298.206 368.596
df 1 8 9
Mean Square 70.390 37.276
F 1.888
Sig. .207(a)
a Predictors: (Constant), size b Dependent Variable: Treynor
Coefficients(a)
Unstandardized Coefficients Model 1 B (Constant) size .252 .001 Std. Error 3.030 .001
Standardized Coefficients Beta .083 .437 1.374 t Sig. .936 .207
a Dependent Variable: Treynor
45
Regression
Variables Model 1 Entered size(a) .
Variables Removed Method Enter
a All requested variables entered. b Dependent Variable: Jensen
Model Summary
Adjusted R Model 1 R .306(a) R Square .094 Square -.020
ANOVA(b)
Model 1
Regression Residual Total
Sum of Squares 10329.349 100091.694 110421.043
df 1 8 9
Mean Square 10329.349 12511.462
F .826
Sig. .390(a)
a Predictors: (Constant), size b Dependent Variable: Jensen
46
Coefficients(a)
Unstandardized Coefficients Model 1 B (Constant) size 77.638 -.013 Std. Error 55.502 .015
Standardized Coefficients Beta -.306 t 1.399 -.909 Sig. .199 .390
a Dependent Variable: Jensen
Correlations
Correlations
Sharpe Sharpe Pearson Correlation Sig. (2-tailed) N Treynor Pearson Correlation Sig. (2-tailed) N Jensen Pearson Correlation Sig. (2-tailed) N size Pearson Correlation Sig. (2-tailed) N 1 . 10 .536 .110 10 -.220 .541 10 .537 .110 10
Treynor .536 .110 10 1 . 10 .046 .899 10 .437 .207 10
Jensen -.220 .541 10 .046 .899 10 1 . 10 -.306 .390 10
Size .537 .110 10 .437 .207 10 -.306 .390 10 1 . 10
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Company Introduction
GlaxoSmithKline Bangladesh Limited is a subsidiary of GlaxoSmithKline plc, one of the worlds leading research based pharmaceutical companies with a powerful combination of skills and resources that provides a platform for delivering strong growth in todays rapidly changing healthcare environment. The Company was incorporated on 25 February 1974 as a Public Limited Company and is listed with Dhaka Stock Exchange Limited. The principal activities of the Company through out the year continued to be manufacturing and marketing of pharmaceuticals, vaccines and healthcare products. Name of the Company has been changed from Glaxo Wellcome Bangladesh Limited to GlaxoSmithKline Bangladesh Limited, effective from 4th September 2002. This change of name took place following global merger of Glaxo Wellcome and SmithKline Beecham in December 2000.
SmithKli SmithKline Beecham (1989) Beecham PLC GlaxoSmithKline (2000) GlaxoWellcome (1995)
Glaxo
Wellcome
Figure1: History of GSK. Source: GSK website
As multinational company, GSK has an excellent internal work environment, outstanding corporate culture, well organized and well-structured work-process, highly effective workforce who works with a common corporate vision and mission. The registered office and factory of the company are situated in Chittagong while its corporate office is located in Dhaka. Currently GlaxoSmithKline owns 82.58% of the share, Investment Corporation of Bangladesh has 15.50%, general public has got 0.98% and the rest 94% has gone to others.
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Company Profile
Corporate Headquarter: GlaxoSmithKline Bangladesh Limited House No 2A, Road no 138, Gulshan-1 Dhaka 1212, Bangladesh. Registered Office: Fouzderhat Industrial Area Dhaka Trunk Road P. O. North Kattali Chittagong - 4217, Bangladesh Manufacturing Site: Fouzderhat Industrial Area Dhaka Trunk Road P. O. North Kattali Chittagong- 4217, Bangladesh Status: Public Limited Company.
General Information
Company Secretary Bankers Mr. Sarwar Azam Khan, FCA, FCS HSBC, Standard Chartered Bank Citibank NA, Agrani Bank, Sonali Bank Auditors A Qasem & Co. Chartered Accountants Legal Advisors Barrister Abdullah Al Mamun Advocate S C Lala
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The Board of Directors

Chairman: Managing Director: Finance Director & Company Secretary: Commercial Director: Non-Executive Director: Non-Executive Director: S Kalyanasundaram M. Azizul Haque Sarwar Azam Khan FCA, FCS Shamim Rabbani Ziaul H Khondker Mehernosh Kapadia
Company Executive Committee

Managing Director: Finance Director & Company Secretary: Commercial Director: Site Director: Human Resources Director: M. Azizul Haque Sarwar Azam Khan FCA, FCS Shamim Rabbani Fariduddin Ahmed, FCMA A.K.M Firoz Alam
GSK Mission Statement

The mission statement explains why GSK in business- Our global quest to improve the quality of human life by enabling people to do more, feel better and live longer. Our mission gives us purpose. Our size gives us opportunity. Our spirit gives us the qualities as individuals and as an organization that will enable us to turn our opportunities into achievements. Our spirit will guide us, keep us focused and differentiate us from the competition. (http://mygsk.com/mission)
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GSK Spirit The Company spirit describes how the company needs to behave if they are to achieve their goal- We undertake our quest with the enthusiasm of entrepreneurs, excited by the constant search for innovation. We value performance achieved with integrity. We will attain success as a world class global leader with each and every one of our people contributing with passion and an unmatched sense of urgency. (http://mygsk.com/sprit)
GSK Vision for the future

GlaxoSmithKlines vision is exciting and will give us the opportunity to make a difference in the health of billions of people. Our value system and operating principles will provide the necessary guide on how we work at GSK. The key to our success will be our desire and passion to pursue GSKs priorities expressed by the business drivers. We want to become the Indisputable leader in our industry. The work we do bring good benefit to the society. Becoming the indisputable leader in our industry isnt up to someone else in another department or another country. Its up to all of us working together, to build a better world for ourselves, our families, and the patients who depend on us. We are now one company, one team, with resources enough to turn opportunity into the delivery of better healthcare to the world. By delivering on our mission, our business success will follow. And the best measure of that success will be an improved quality of life for people around the world who will be able to do more, feel better and live longer. GSK Quality Statement Quality is at the heart of everything we do-from the discovery of the molecule, through product development, manufacture, supply and sale- and is visual to all the service that supports our business performance.
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GSK in Time Every second, more than 35 doses of vaccines are distributed by GlaxoSmithKline. Every minute, More than 1100 prescription are written for GlaxoSmithKline products. Every hour, GlaxoSmithKline spends more than US$ 450,000 to find new medicines. Every day, more than 200 million people around the world use a GlaxoSmithKline brand tooth brush or tooth paste. Every year, GlaxoSmithKline donates more than US$ 148 million in cash and products to communities around the world.
Recognition & Achievement

The Institute of Chartered Accountants of Bangladesh (ICAB) conducts an evaluation of the published annual reports and accounts of the listed companies based on stringent criteria set by the South Asian Federation of Accountants (SAFA). Among the competition of non-financial listed companies GSK secured the first position for the year 2002. GSK secured second position for the publishing of annual repot 2004 at ICAB award in non-financial sector.
Key Products of GSK

GSK Bangladesh covers nearly all drugs like Respiratory, Anti-depressive, Vitamins, Gastro- intestinal, Cough and Cold preps, Oral steroid, Eye/Ear drops, Anti-bacterial, Anti-viral, and Non-Pharmaceutical. The top pharmaceutical products of GSK in Bangladesh (as per December 2006) are:
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Table1: Product index of GSK Product Zantac Piriton Zinnat Crystapen V Parapyrol Betnovates Ventolin Ceporex Grisovin FP Amoxil Peflon Glaxipro Dermovate Neobacrin Seretide Ventolin Betnelan Betnesol Lanoxin Actifed
Source: GKS Marketing Department
Vaccines Priorix Varilrix Typherix Havrix Engerix B Tritanrix HB Mencevax - ACWY Hiberix
Non Pharmaceutical Dextrose Horlicks

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FINANCIAL PERFORMANCE AND CHARACTERISTICS OF PHARMACEUTICAL AND CHEMICAL INDUSTRY IN BANGLADESH: MULTINATIONAL VERSUS DOMESTIC CORPORATIONS

Shoeb Ahmed ID # 0330056

INDEPENDENT UNIVERSITY, BANGLADESH May 2008

Shoeb Ahmed ID # 0330056

has been approved May 2008

____________ Shoeb Ahmed. ID # 0330056

Sharpe Measure, Where,

Jensen Measure, Where,

= RiG - [ RfG + i ( RmG - RfG )]

2.0 Literature Review

Figure 1: Markowitz Portfolio Selection

Jensen Measure, Where,

= The risk premium on the stock i

Treynor Measure, Where, RiG = Geometric average return on stock i

RfG = Geometric average return on risk free security

= RiG - [ RfG + i ( RmG - RfG )]

i = Securitys beta RmG = Geometric average market return

3.0 Analysis of Performance

0.0 0.2 0.4 0.7 0.9

0.2 0.4 0.7 0.9 1.0

4.0 Summary and Discussion

2.7439903 2.544081651 2.559840905 3.541728369

2.458390071 32.79223821 -2.165605504 12.10972486 4.817824843 3.351197032

Mean 3.5960 11.6700 2.2640 4.6560 72.9480 4.6020

Std. Deviation 1.17496 12.32964 1.49463 9.29188 157.11293 1.14218

Std. Error Mean .52546 5.51398 .66842 4.15545 70.26304 .51080

Independent Samples Test

Levene's Test for Equality of Variances

t-test for Equality of Means

Upper 4.6988 7 7.1970 5 7.3136 7 9.0705 4 230.37 713 263.42 449

Debt to Equity Ratio

type MNC DMC

Mean .1058 .2081

Std. Deviation .01510 .09070

Std. Error Mean .00571 .03428

Independent Samples Test

Levene's Test for Equality of Variances

Debt Equity Ratio

Equal variances assumed Equal variances not assumed

type MNC DMC

Mean .0350 .9292

Std. Deviation .03240 .53283

Std. Error Mean .01449 .23829

Independent Samples Test Levene's Test for Equality of Variances

t-test for Equality of Means 95% Confidence Interval of the Difference

F STDEV Equal variance s assumed Equal variance s not assumed 10.893

Sig. (2tailed) .006

Mean Differen ce -.89420

Std. Error Differen ce .23873

Lower 1.4447 1 1.5551 0

Variables Model 1 Entered size(a)

Variables Removed . Method Enter

a All requested variables entered. b Dependent Variable: Sharpe

Adjusted R Model 1 R .537(a) R Square .288 Square .199

Std. Error of the Estimate 8.31421

a Predictors: (Constant), size

Model B 1 (Constant) size

Unstandardized Coefficients Std. Error 4.126 .001

Standardized Coefficients Beta

.464 .537 1.798

a Dependent Variable: Sharpe

Variables Model 1 Entered size(a)

Variables Removed . Method Enter