The economic development of Bangladesh, a country of the third world, is closely related to the fluctuations of macroeconomic and capital market factors. The political stability of the country has great influence over prosperous capital gains, which directly affects the unexpected ups and downs in share prices. Other important factors that affect the performance of the stock market in Bangladesh are the changes in composition of investors, availability of other investment assets, and markets sentiments (Fabozzi and Modigliani, 1995). The two Bangladeshi stock exchanges (Chittagong Stock Exchange and Dhaka Stock Exchange) experienced a dramatic crash in 2010-11. Three main factors led towards such critical point: faulty asset revaluation, improper use of omnibus accounts, and the immense remittance flows that resulted with current account surpluses prior to the crash.
The motivations behind the decisions associated to asset revaluation are influenced by credit covenants, management incentives, faithful representations and other reasons (Adina, 2013). The changes in accounting methods by Bangladeshi firms led to distinct response in the form of share price fluctuations. The companies in this country, with the help of dishonest auditors, generated faulty audit reports that overvalued their assets. Since wrong signals were provided about the realistic financial competence of different companies and bonus shares that were issued, the New Asset Value was unrealistic. The wrong information sent to investors was one of the main factors that set the foundation for this crisis.
In addition to asset revaluation, the improper use of omnibus accounts also contributed towards the crisis of the stock market of Bangladesh. Omnibus stock holding accounts are a specific type of accounts that involve multiple investors who do not have the accounts in their names, although they are actual shareholders. These accounts were one of the major devices of manipulation in the Bangladeshi stock market. Investigation reports showed that omnibus accounts were used for making manipulative transactions of over Taka 2.5 billion. The biggest reason for the usage of omnibus accounts by the big players was the ability to gamble in the market without disclosing the actual number of shares from omnibus accounts.
Due to the beneficial climate for manipulative activities on the stock market, wrong directives and unethical behavior of market regulators and their employees, an artificial active trading environment was created among some manipulators. In addition to these factors, the huge remittance flows contributed to serious account surpluses. Instead of keeping the money on bank savings account, many people were lured into making great investments on the “favorable” stock market that promised earning more money within a short period of time. Due to lack of investment knowledge and faulty information provided by the manipulators, inflation went past 11% by the 2010 and the bubble burst.
Stakeholders, market analysts and economists name faulty asset revaluation, usage of omnibus accounts and uninformed investing as three of the most important reasons for the Bangladesh stock market crash. The suspicious transactions of the top players created artificial climate that affected the behavior of all other investors. The combination of these three factors led to an abnormal rise and an inevitable fall.