Fundamental factors influencing returns of shares listed on the Johannesburg Stock Exchange in South Africa

Marise Vermeulen

doi:10.4102/jef.v9i2.50

Abstract

This study investigated the relationship between share returns and nine variables that had been proven to influence returns in previous research, using a multiple regression analysis. These variables are size, leverage, book-to-market ratio, earnings yield, dividend payout, earnings growth, return on equity, earnings per share and asset growth. The impact of some of the variables on share returns proved to be insignificant, and some collinearity was identified between some of the variables. However, three significant variables were identified and the final regression model included the book-to-market ratio, dividend payout and leverage as the explanatory variables.

Highlights

AND PRIOR RESEARCHThe capital asset pricing model (CAPM) is still probably the most popular asset pricing theory today, stating that average share returns are explained by beta and expected market returns
An initial review of the correlation of the variables with return showed that size, leverage, the book-to-market ratio and dividend payout were all significant at the 5% level
In this study a multiple regression analysis was used to determine the effect of nine different variables on the annual return of a sample of JSE-listed shares

Summary

Introduction

The capital asset pricing model (CAPM) is still probably the most popular asset pricing theory today, stating that average share returns are explained by beta and expected market returns. The results of many studies contradict this model and show that there are other variables such as size, leverage, book-to-market ratio and earnings yield that might have a more significant effect on average share returns. One of the more prominent contradictions is the size effect found by Banz (1981) He found that, on average, smaller firms earned higher risk-adjusted returns than larger firms. On average, smaller firms earned higher risk-adjusted returns than larger firms He believed that the ‘size effect’ that had been in existence for at least 40 years at that stage was evidence that the CAPM was misspecified. Banz measured size in terms of market capitalisation (total market value of listed equity)

Objectives

Results

Conclusion