Faculty of Commerce, Law and Management

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Size- and Book-to-Market Anomalies on the JSE – Testing for the effect of market condition
(2011-11-11) Gudde, Christian Rudolf
The aim of market investors is to maximise their returns from the market. Often they do this by the use of historical financial (and other relevant) information about companies and their share prices. The search for arbitrage opportunities has led to the identification of anomalies such as the size and book-to-market effects but very little research has gone into the changing of these effects over time. They have generally only been identified over long time periods on markets around the world. This investigation used the returns of portfolios based on market capitalisation or book-to-market ratio (or both) and regression analyses at specific dates at which the market conditions changed from those of a bull market to those of a bear market. This study has shown that magnitude and direction of the size and book-to-market effects change over time and that the market condition (bull or bear) is not a direct indicator of the state of the effect, although it does seem to suggest a lagged impact. The research suggests that there are significant and exploitable differences in portfolios chosen along the lines of market capitalisation or value indicators. Though no causal relationship for the existence of these anomalies has yet been identified, it seems that bear-market conditions have an impact on the magnitude (and direction) of anomalies. Since this impact continues to be seen after the bear markets, this knowledge could be exploited to reduce losses (by disinvesting in stocks that are likely to yield worse results) or even increase gains in portfolios depending on prevailing market conditions
Aftermarket price performance of initial public offerings on the JSA: 1980-1998
(2011-10-14) M’kombe, Chamu Mark
It is generally accepted that investors who invest in initial public offering shares on the Johannesburg Stock Exchange (JSE) expect to get returns that are in line with the risk to which they expose their investments. It would be beneficial for these investors, particularly those who invest for long periods of time, to know what returns their investments are likely to yield. It would equally be advantageous to managers of companies that intend to list on the JSE and to their advisors, to understand the critical factors that influence the performance of initial public offerings in the medium and long-term periods. This research intended to answer three main questions regarding the performance of initial public offerings after listing. These questions were:- i) Do shares that list on the JSE yield risk-adjusted abnormal returns? ii) Are the returns received after investing in initial public offerings on the JSE dependent on the holding period of the investment? iii) Do certain characteristics of the initial public offering process influence the returns after listing? The period of study was 1980 to 1998. Three risk-adjusted benchmarks were used to determine whether the shares that listed on the JSE yielded risk adjusted positive returns. These benchmarks were the CAPM model, the book-to-market reference portfolios and the market capitalisation reference portfolios. All three benchmarks indicated that on average, the returns yielded by the initial public offering shares were less than the risk adjusted expected returns. Furthermore, it was shown that the difference between the expected returns and the actual returns increased with the holding period of the investment. The differences were statistically significant. The research also found that certain characteristics of the initial public offering process (e.g. the listing price and the capital raised) could have influenced the returns
Use of the Efficient Frontier Method In Unit Trust Portfolio Selection
(2011-07-14) Mugivhi, Thomas Vhutshilo
This paper investigated whether optimal market portfolios delivered returns superior to those of existing unit trust portfolios over a five-year period. Three sets of unit trust portfolios were used for the research and they represented the Large Capitalization, Mining & Resources, and Financial & Industrial sectors of the JSE Securities Exchange. For each of the three sectors, an optimised market portfolio was constructed using the efficient frontier method, and these were compared and contrasted with existing portfolios. The optimised market portfolios consistently resulted in higher Sharpe ratios compared with existing unit trust portfolios over the period under review. Assertion that optimal market portfolio produce returns, which are superior to those of existing unit trust portfolio was confirmed
A review of the efficiency of the JSE Securities Exchange
(2011-06-24) Wood, Adrian Michael
The ability of stock markets to function and operate efficiently has long been a question posed by academics and investors alike. In an efficient market, all information is reflected within share prices and therefore leaves no chance for economically viable arbitrage opportunities. Although this notion has been supported by the Efficient Market Hypothesis, it has come under scrutiny over the last three decades. This report has attempted to establish the extent to which the JSE Securities Exchange is an efficient market, based on the outcomes of previous empirical studies done from 1974 and 2006. Using the Historical Research Methodology, it has been found that overall the JSE Securities Exchange operates as an efficient market, in all forms of the Efficient Market Hypothesis. Along with this conclusion however, is an indication that the market also show signs of inefficiencies for certain stock types, which may have been exploited by shrewd investors
Firm size, book-to-market and expected
(2011-06-24) Welham, Juliette Renate
Investment analysts have long been preoccupied with the idea of predicting future returns based on historic share price performance or company values. To this end, Fama and French (1992) found in their acclaimed study of U.S. markets that for the period 1963 to 1990, market capitalisation (size) and book-to-market (BtM) combined to capture the crosssectional variation in average stock returns. This study was therefore conducted to determine whether size and BtM, independently or combined, are effective in explaining the cross-section of average returns on stocks listed on the JSE Securities Exchange South Africa (JSE) during the period between March 1996 and December 2008. On average, the full-period results indicate that 1) value stocks tend to be three times more profitable than growth stocks per unit of risk; 2) small stocks tend to be twice as profitable per unit of risk as large stocks, but that large stocks outperform small stocks on a valueweighted risk-adjusted basis; and 3) small value portfolios tend to significantly outperform large growth portfolios, with returns that surpass those achieved independently by either small size or high value portfolios
The influence of macroeconomic
(2011-06-15) Reddy, Sugendree
This paper uses Fama and MacBeth (1973) methodology for deriving factor realisations from a group of economic indicators for the South African economy, in order to test the effect of economic factors on asset returns in an arbitrage pricing theory framework. Four factors were tested against the All share, Top 40, Industrial 25 and Resource 40 indices. No significant evidence was found of the gold price, foreign exchange rate, 10 year bond rate or prime overdraft rate factor beta coefficients having significant influence on asset returns in the four selected indices of the Johannesburg securities exchange for the period 1996 – 2008
Market responses to unexpected earnings of
(2011-06-10) Laura Schaffer, Laura Schaffer
The presence of a predictable share price response to a surprise in announced earnings by listed companies has been documented in US equity markets since 1968. This research investigated whether the presence of a positive or negative earnings surprise for companies listed on the JSE Securities Exchange resulted in an equivalent predictable share price response. The research was conducted on a sample of 112 companies listed on the JSE Securities Exchange between the period 1 February 2001 and 8 August 2007. The study analysed share price responses to 946 earnings surprise events over the three-day trading window around the actual earnings announcement date. Sell-side analyst earnings forecasts as published on INET Bridge were used as a proxy for the earnings expected by the market at the time of the company earnings announcement. The results of the event study showed a weakly positive share price response to a positive earnings surprise, the presence of which was not sustained once a few extreme values were excluded from the sample. The event study results for negative earnings surprises were more conclusive in showing no predictable significant share price response.
FUND SIZE AND ABNORMAL RETURNS IN
(2011-06-08) Pillay, Neelan
Market sentiment, popular press and the academic fraternity all seem divided on the issue of whether a fund’s asset base affects its performance such that the delivery of above average market returns is impacted. A historical simulation was employed in constructing hypothetical active portfolios of varying asset sizes for each of the years, 1991 to 2005. The portfolios consisted of 40 randomly selected stocks; chosen from an investment universe made up of the top 160 listed shares on the JSE, based on market capitalisation. Each portfolio was simulated a 1,000 times per fund size, per simulation year. The results of the simulation indicated a fund’s size to be a contributing factor to its performance with market/stock liquidity the underlying reason for this relationship. Active management at the larger end of the fund size spectrum is ineffective such that a portfolio manager’s stock picking ability is severely compromised resulting in average or below average performance results. Related to this non-performance, large fund managers are not likely to earn out-performance management fees. The relevance of these findings to the South African fund management industry is for large funds to stop their active betting taking and to switch to passive investment strategies. Further, to alter their current out-performance management fee structures accordingly Small to medium sized portfolio managers must be aware of the size effect ensuring that their funds are ‘capped’/closed to inflows when their asset base starts to constraint their active positions
Comparative performance of
(2011-05-19) Mmolawa, Obakeng Noah
Exchange traded funds have generated a great deal of interest in markets where they have been introduced including in the South African investment market. In South Africa exchange traded funds are still relatively new and the range available is fairly narrow, however their popularity is growing at a fast rate. Since the introduction of exchange traded funds in South Africa, starting with the listing of the Satrix40 in November 2000, exchange traded funds have emerged as a viable investment alternative to unit trust funds. Given that exchange traded funds are available at low cost, and that they are likely to outperform active funds of similar risk, the question is: would an investor be better off investing in an exchange traded fund than in a unit trust portfolio. The purpose of this research was to compare the performance of an aggregate domestic general equity unit trust fund, to that of the Satrix40, an exchange traded fund, and to determine if an investor would have been better off investing with the aggregate general equity unit trust manager or in the Satrix40. Results from the comparative study of performance indicate that, after costs, the cumulative average abnormal returns of the Satrix40 are significantly more than those for an aggregate general equity unit trust portfolio. This suggests that an investor would have been better off investing with the Satrix40.
The Effect of Dividend Signalling on Earnings and Share Prices in South Africa
(2011-05-19) Mohamed, Nadim
The dividend information signalling hypothesis is one of the more popular theories that address the questions: “Why do companies pay a dividend?” and “Should the dividend have any effect on firm valuation?”. A key premise of the signalling hypothesis is that the dividend contains information regarding management’s insider view of a firm’s future prospects. As a consequence, investors are expected to revise their valuation of a firm upon the release of news of a substantial change in dividend. Furthermore, the dividend change itself is expected to be positively correlated with future changes in firm performance. This study provides evidence regarding the relevance of the signalling hypothesis for the JSE by measuring both of these consequences. A total of 238 dividend change events were collected for the period 1998-2008. The methodology employed improves on previous South African studies by considering the common practice of declaring dividends together with earnings releases. Regression analysis is used to isolate the effect of only the dividend portion of this joint dividend-earnings signal. It was found that the 2-day cumulative abnormal return on the day of a dividend announcement is positively related to the change in dividend from previous year to announcement year. This implies that the market reacts positively to dividend increases and negatively to dividend decreases. However, changes in earnings in the year following the announcement are, at best, weakly correlated with the observed change in dividend. This finding suggests that the dividend information signalling hypothesis is not a good justification for the observed market reaction to dividend events on the JSE. Other theories such as the Agency Theory might be more successful in explaining this market reaction

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