School of Economics and Finance (ETDs)

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    Institutional determinants of dividend policy: the case of African listed firms
    (University of the Witwatersrand, Johannesburg, 2024) Tembo, Margret; Chipeta, Chimwemwe
    This study examines the institutional determinants of dividend policy of African listed firms over the period from 2006 to 2020. While existing research extensively examines institutional influences in developed markets, there is a significant gap in understanding these dynamics within the African context. Utilizing a panel regression approach with generalized method of moments (GMM) estimations, the study comprises three essays. The first essay offers a comprehensive analysis of institutional determinants, specifically examining how investor protection, press freedom, property rights, financial development, and corruption shape dividend policy in African firms. The results underscore the pivotal role of institutional factors, highlighting investor protection, financial development, and press freedom as key determinants. Based on these findings, policymakers should prioritize strengthening investor protection laws, advancing financial sector development, and ensuring press freedom to create a more attractive environment for investment. The second essay explores the relationship between innovation and dividend policy in Africa, revealing a significant negative correlation. It also investigates whether institutional development influences this relationship. Results indicate that institutional development moderates the innovation-dividend policy relationship. The negative relationship is pronounced in countries with weak institutional development and tends to be positive in those with strong institutional development. Based on these findings, policymakers should focus on improving institutional quality to facilitate both innovation and dividend distribution, thereby supporting sustainable corporate growth and shareholder returns. This third essay examines the institutional factors influencing dividend smoothing in African firms. The study finds that African firms exhibit a speed of adjustment (SOA) of 0.539, indicating a moderate level of dividend smoothing, and a target payout ratio of 0.484, suggesting they pay out a high percentage of their earnings as dividends. The research highlights that firms operating in environments with low economic growth, civil law regimes, weak investor protection, weak property rights, low press freedom, underdeveloped financial institutions and markets, high corruption, weak government effectiveness, weak political stability, weak regulatory quality, and weak rule of law tend to engage in increased dividend smoothing. To address this, policymakers and business leaders in African emerging markets should prioritize improving governance and institutional quality. This can mitigate agency costs and information asymmetry, reducing the need for dividend smoothing. Strengthening investor protection, property rights, press freedom, financial markets, and governance standards will create a more stable investment climate. In conclusion, this research underscores the importance of institutional improvements in shaping dividend policies in African non- financial firms
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    How does Integrated Report Quality Affect Decision-Making? An equity analyst perspective in the South African market
    (University of the Witwatersrand, Johannesburg, 2024) Sebastian, Avani; Seetharam, Yudhvir
    A key source of information about a company is their integrated reports, whose main purpose is to improve the quality of information available to investors. Seminal behavioural finance literature shows that, in situations where market participants perceive potentially imperfect information, they may be inclined to behavioural biases in their estimation of the value of a firm’s shares. However, prior literature also shows that behavioural bias may be present even when there are no evident deficiencies in the information environment. This study explores the relationship between the quality of integrated reports and behavioural bias in the South African equity market. Integrated report quality is approximated by the scores awarded by adjudicators of the EY Excellence in Integrated Reporting Awards. The study focuses on sell-side equity analysts as market participants. A convergent mixed methods design was used. Quantitative analysis was in the form of a structural equation model with latent variables for quality and each of the behavioural biases. The model incorporated data from 2208 forecasts from 316 analysts, across 342 company-years. Semi-structured interviews with 20 sell-side equity analysts were conducted to provide the context necessary for a meaningful evaluation. Across all methods of analysis, findings show that the quality of information in the integrated reports has little to no effect on the analysts’ decision-making processes. Findings from the interviews indicate that analysts consider direct interactions with management to be the most important source of information for their reports and forecasts. In these interactions, they rely on “gut feel” to establish credibility of management’s assertions. Regarding bias, the quantitative analysis showed that herding has a negative and significant association with the quality of analysts’ forecasts. The qualitative analysis confirmed the analysts’ view of the consensus forecast as a benchmark. Considered with findings of the lack of use of integrated reports, it is inferred that analysts view the consensus forecast as a more useful source of information than the information in the integrated reports. Despite the use of indicator variables with prior literature as precedent, the results of the analysis can vary depending on the choice of measurement approximations for the behavioural biases. The study makes a theoretical contribution by connecting research on integrated report quality and behavioural bias. It shows that analyst coverage, even if sponsored by the company, is considered necessary to reduce information asymmetry, despite the production of integrated reports. The study makes a methodological contribution with its analysis of qualitative data from interviews with analysts. Based on the findings, it considers how general debiasing strategies could be used in the context of analysts, thereby making a practical contribution.
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    Oil Price Shocks and Financial Stress in Sub-Saharan African Countries
    (University of the Witwatersrand, Johannesburg, 2024) Frost, Callum
    This study examines the nexus between financial stability and oil shocks within South Africa, a net-oil importer, and Nigeria, a net-oil exporter. A signal theory approach utilising pAUROC analysis is used to capture relevant indicators. Furthermore, sub-market indices are weighted using a diagonal BEKK-GARCH model, allowing for time-varying cross-correlations to determine sub-market weights, allowing the constructed financial stress index (FSI) for each economy to focus on systemic events of financial stress. The FSI for each economy is then incorporated into a SVAR model which disaggregates oil demand shocks into three components (economic activity, oil consumption demand, and oil inventory demand) following the framework of Baumeister and Hamilton (2019) to capture the effects of oil market shocks on financial stability. This paper finds that positive shocks to oil supply, economic activity, and oil inventory demand tend to reduce financial stress in South Africa. Interestingly, demand driven increases in the real price of oil reduces systemic stress, even though the economy is a net-oil importer. Oil supply shocks and economic activity shocks tend to have no significant effect on Nigerian financial stress while demand driven increases to real oil prices tend to decrease financial stress. Interestingly, shock increases in demand for oil inventories tends to raise financial stress.
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    House Prices Against the Wind: Analysis of the use of Monetary Policy to Moderate House Price Bubbles and the Case of New Zealand
    (University of the Witwatersrand, Johannesburg, 2024) Jinabhai, Nikhil; Creamer, Kenneth
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    The price effects of a hospital merger: a case study of the Mediclinic Southern Africa (Pty) Limited (Mediclinic) and Matlosana Medical Health Services (Pty) Limited (MMHS) merger
    (University of the Witwatersrand, Johannesburg, 2024) Laurence, Marcelle; Mncube, Liberty
    This study evaluates the assessment conducted in the prohibited Mediclinic Southern Africa (Pty) Ltd and Matlosana Medical Health Services (Pty) Ltd (MMHS) proposed merger. The study employs a qualitative approach, centred on a case study methodology, to assess the theories of harm discussed. It aims to provide insights into the adequacy and outcome of the competition authorities’ assessment drawing comparisons to international literature and policy implications. It uses economic theory to analyse and show the significance of robust and nuanced regulatory frameworks in healthcare merger evaluation.
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    Examining the relationship between governance and gross fixed capital formation in Sub-Saharan Africa
    (University of the Witwatersrand, Johannesburg, 2024) Machobani, Dennis; Mahonye, Nyasha
    This study delves into the intricate relationship between governance and Gross Fixed Capital Formation (GFCF) in Sub-Saharan Africa (SSA), aiming to address the substantial infrastructure deficit in the region. Employing the System GMM methodology, the primary research question focuses on understanding the correlation between institutions and GFCF in SSA. Subsequent sub-questions delve into the relationships between political stability and GFCF, as well as the composite index of institutions and GFCF. Policy recommendations highlight the pivotal role of good governance, advocating for reforms, institution strengthening, and enhanced transparency. The study's outcomes emphasize the intricate interplay of diverse factors impacting GFCF, prompting policymakers to adopt comprehensive strategies for sustainable development. Persistent effects of past investment choices underscore the necessity for continuous efforts to incentivize investment. Key determinants such as trade policies, current account balances, gross domestic savings, and government expenditure are identified, suggesting targeted interventions to stimulate private sector engagement and cultivate an environment conducive to heightened investment in Sub-Saharan Africa.
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    Determinants of optimal capital structure for non-financial firms listed on the JSE
    (University of the Witwatersrand, Johannesburg, 2024) Chipeta, Chimwemwe
    This paper investigates the determinants of optimal capital structure while considering the influence of the cost of capital, specifically examining the relationship between firm-specific variables known to drive optimal capital structure (such as firm size, asset tangibility, growth, liquidity, and profitability) and the cost of capital. The analysis of these determinants in developing countries is intriguing due to the differences in firm characteristics compared to those in advanced economies. The study utilizes primary data sourced from Refinitiv Workspace for 189 firms across various sectors listed on the Johannesburg Stock Exchange (JSE) from 2015 to 2023, excluding financial services and insurance sectors. Panel econometric approaches, including Feasible Generalised Least Squares (FGLS) and the Generalised Method of Moments (GMM) regression method, are employed for analysis. The findings of the study unveil several noteworthy relationships between independent variables and the Weighted Average Cost of Capital (WACC). Firm size, profitability, asset tangibility, and growth emerge as key determinants affecting WACC to varying degrees. Firm size and profitability exhibit positive associations with WACC, supported by statistically significant coefficients. This implies that increases in firm size and profitability correspond to higher WACC levels. Conversely, asset tangibility and growth demonstrate negative correlations with WACC, backed by statistically significant coefficients. Furthermore, firm size and profitability maintain their positive relationships with WACC across various estimation models, including Feasible Generalized Least Squares (FGLS) and Generalized Method of Moments (GMM). This consistency underscores the robustness of these relationships, with larger and more profitable firms consistently exhibiting higher WACC.
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    Measuring the performance and asset allocation of robo-advisors in BRICS
    (University of the Witwatersrand, Johannesburg, 2024) Maluleke, Lethabo; Seetharam, Yudhvir
    The financial industry has undergone some digital changes over the past decade. Financial technology (FinTech) is a result of this digital change and robo-advisors constitute FinTech in the wealth management space. The emergence of robo-advisors is a global phenomenon and, in this study, the performance and asset allocation of the robo-advisors from Brazil, Russia, India, China, and South Africa (BRICS) were measured. BRICS countries are one of the largest growing economies and provide international investors with diversification. The purpose of this study was to analyse if the recommended portfolios of the robo-advisor can perform similar to a benchmark and to explain the performance differences between the different recommended portfolios of the robo-advisors from each country using a returns-based style analysis. Furthermore, this study analysed the performance of robo-advisors before and after considering fees and the returns-based style analysis was also used to capture the exposure of each robo-advisor to mutually exclusive asset classes. The data included four robo-advisors in total with one robo-advisor from each country (a total of 62 portfolios) as there was a removal of the Russian EFTs due to the Russian- Ukraine war of 2022. The sample period was from 2015 to 2022 as most robo-advisors only became available after 2015. The performance tests that were performed were the Sharpe ratio, Jensen’s alpha, Treynor ratio and Manipulation-proof performance measure. It is found that there are certain countries that have robo-advisors with portfolios that perform similar to the benchmark and do not outperform the benchmark and other countries that have portfolios that outperform the benchmark and the portfolios do not perform similar to the benchmark. Furthermore, it is found that performance differences can be explained by the investment style i.e., whether the portfolios have exposure to the same assets. The performance differences can also be explained by asset allocation in each portfolio based on uncorrelated assets.
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    Post Earnings Announcement Drift on The JSE Top 40: A Study on Longer Term Holding Periods
    (University of the Witwatersrand, Johannesburg, 2024) Msutu, Yonela Neo; Britten, J.
    This paper studies the existence of the post-earnings announcement drift (PEAD) on the JSE top 40. The sample period used was from 2000-2020. The measures of surprise earnings used in this paper were the standardised unexpected earnings (SUE) and the initial 2-day returns (IR). The existence of PEAD was determined using portfolios sorted half yearly by the surprise measure of which the high minus low quantile spread (QS) was computed. A cross- sectional regression is run to determine if firm characteristics affect the PEAD. Cumulative abnormal returns (CARs) were used as a proxy PEAD and computed using the market model. PEAD drift exists on the JSE top 40, and the QS was found to be persistent for a 480-day trading window for both surprise measures. The PEAD anomaly found by QS was robust to a subsample period and the method of CAR computation. The IR-sorted portfolios generally outperformed the SUE-sorted portfolios. The SUE portfolio coefficients were insignificant in cross-sectional regression, while IR coefficients were up to the 360-day trading window.
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    The Effect of Ownership Type and Corporate Governance on Capital Structure: A South African Perspective
    (University of the Witwatersrand, Johannesburg, 2024) Notshikila, Akhona
    This study investigates the effect of ownership type and corporate governance on capital structure decisions of non-financial firms listed on the Johannesburg Stock Exchange (JSE). It examines 109 firms listed over a 23-year period from the year 2000 to 2022. The main research question is whether ownership type and corporate governance factors have an effect on capital structure among firms listed on the JSE or not? The rationale for the study is the lack of empirical evidence in the South African context on the countries diverse ownership types and its effect on key financing decisions. Further, the lack of empirical evidence to support among others, principle 7 of the King IV Code of corporate governance which calls for diversity and board independence, drives this research (BDO, 2016). Ownership type variables employed are institutional, managerial and black shareholding. Corporate governance is examined through the lens of board independence, board size, board gender diversity and CEO duality. Using the fixed effects regression model, the results reveal that institutional and managerial ownership both have a statistically significant inverse relationship with firm leverage. Black ownership is generally found to have no effect on capital structure with the exception of short- term debt, where an inverse relationship exists. Board size and CEO duality are negatively related to capital structure, whereas board independence and board gender diversity are positively related to firm leverage.