The impact of Broad Based Black Economic Empowerment compliance on profitability of companies listed in the Johannesburg Stock Exchange: a cross industry analysis

Abstract

The aim of this study is to determine if companies listed on the Johannesburg Stock Exchange that comply with Broad Based Black Economic Empowerment (“BBBEE”) policy exhibit abnormal operating financial performance. Whereas previous studies focused on the impact of BBBEE on shareholder wealth by measuring abnormal returns on share prices, this study focuses on the impact of BBBEE on operating financial performance of BBBEE companies. Further, previous studies have focused on just the ownership element of the scorecard; this study BEE considers all the elements of the scorecard by using BEE scores to measure compliance. BBBEE scores, which are used to determine compliance, are obtained from Empowerdex website as well as publications of the Financial Mail Top Empowered Companies (“TEC”) for the years 2004 to 2013. This study uses operating cash flows return as a proxy for operating financial performance. Industry adjusted cash flow returns are used to detect abnormal operating performance. The study uses a sample of 203 companies. The findings show that BBBEE compliant companies achieve a positive abnormal cash flow return of 2.31% over a 10 year period. Further, the findings show that the industry in which a company operates also influences whether or not a company benefits from BBBEE compliance. The study also reveals that BBBEE compliance mostly benefits companies during favourable economic periods as BBBEE companies achieve positive excess returns of 4.15% in the period prior to the economic crisis. Finally, the study reveals that the highest compliant firms are not necessarily the highest performers