The contribution of the seven BBBEE elements to excess returns on the JSE Securities Exchange

Abstract

The purpose of the research is to determine which of the seven Broad Based Black Economic Empowerment (BBBEE) elements contribute to higher share price returns on the Johannesburg Stock Exchange (JSE) following the publication of the companies‟ BBBEE scores. Previous research on BBBEE and the JSE has focused on the market reaction to ownership transfer announcements, but this study focuses on the ongoing implementation of the other BBBEE elements. BBBEE scores of JSE-listed companies are obtained from the Financial Mail Top Empowerment Companies (TEC) publications of 2005 to 2009. This study uses the Event Study methodology to determine if the ranking on the TEC leads to change in the share price of listed companies, and then uses the findings to determine which of the seven BBBEE elements contributes most to share price movement. The finding shows a positive excess return of more than 2% post-publication for companies listed in the TEC and a difference of 4.5% between the ranked and unranked companies. The results of the regression analysis indicate also the seven BBBEE elements significantly explain the magnitude and direction of those excess returns. Contrary to expectations, the study also found the Management Control and Skills Development elements are perceived to destroy Value by reducing the excess returns of ranked companies. The Enterprise Development element is found to be insignificant, thereby not contributing to the excess returns of the ranked companies. The results of the other four elements of Ownership, Employment Equity, Preferential Procurement, and Socio-Economic Development show a positive and significant contribution to the abnormal returns. The study established the market notices the economic Value-add of proper BBBEE implementation and that it responds to verified BBBEE scores of listed companies. However, the market is also very clear about which elements it considers destroy Value and should not form part of BBBEE.