An evaluation of corporate actions as a shareholder wealth creation mechanism for JSE-listed investment holding companies

Abstract

Background: Investment holding companies represent a category of company primarily focused on adding value by increasing the value of the stakes in the businesses they own. In South Africa there is a trend for Investment Holding companies to trade at a price lower than their reported intrinsic net asset value that is widely commented on by management teams and the financial press. It is also accepted that corporate actions are known to have an impact on share price and investor behaviour.

Purpose: The purpose of this research is first to quantify the discount to intrinsic net asset value across a sample of holding companies. This research will also determine if corporate actions pursued by holding companies have reduced any discounts which exist and, in the process, created value for shareholders. Finally, an assessment of which corporate actions is most effective in reducing the discount (if any) will be prepared.

Method: Discounts are quantified by comparing daily share prices to the reported intrinsic net asset value. The impact of corporate actions is evaluated using an event study methodology using multiple estimation models.

Results: The results showed that corporate actions resulted in no significant abnormal returns apart from in a six-month event window after the event announcement date. Statistically significant negative abnormal returns were noted in this event window. This indicates that corporate actions are not an effective way of reducing the discount to intrinsic net asset value.

Contribution: This research adds to the existing JSE event study literature by focusing on a specific subset of companies. The research makes a theoretical contribution by suggesting value creation strategies for businesses which may be fundamentally mispriced