The determinants of earnings growth for firms on the JSE: an empirical analysis

Abstract

This research aims to aid managers, analysts and private investors in their valuations of companies by identifying those factors which can greatly influence the future earnings growth of a firm. The researcher hypothesized that dividend pay-out, as well as real GDP, play a crucial role in determining the earnings growth rate for firms. The study used a multivariate panel regression model, which was adapted from the model first put forward by Zhou and Ruland (2006). Previous literature has focused on the sustainable growth model and whether the relationship between dividend pay-out ratio and earnings growth holds true (Arnott and Asness, 2003, Zhou and Ruland, 2006, Flint et al., 2010, Vermeulen and Smit, 2011). This has resulted in a one-dimensional focus on the factors which can influence the earnings growth. In addition, earnings growth is a key concern for any analyst when determining the value of a company. Prior literature shows there are many factors which can influence the growth and success of a firm and its earnings (Lewis and Churchill, 1983, Brown et al., 2005). This study aims to contribute to the prior literature in the form of an additional factor, such as real GDP, which could have an influence on the earnings growth of JSE and AltX listed firms. The findings reveal that the model still struggles to predict future earnings growth. There is no significant relationship between dividend pay-out and earnings growth, despite the contrasting results of previous studies. The findings also reveal real GDP does not significantly influence the earnings growth. The results indicate a tendency among investors to return to investing fundamentals in the short-term when there is a high level of uncertainty in the political, financial and economic sphere in South Africa.