The Effect Of Earnings Per Share Categories On Share Price Behavior: Some South African Evidence

Abstract

Earnings per share (EPS) is considered as an important accounting indicator of risk, entity performance and corporate success. It is used to forecast potential growth in future share prices, because changes in EPS are often reflected in share price behaviour. Companies listed on the Johannesburg Share Exchange (JSE) are required to publish three different categories of EPS: basic, diluted and headline EPS. It has become apparent that there is no indication as to which category explains share price behaviour best. The study therefore aimed to determine which category of EPS is best associated with share prices of the top 40 JSE listed companies in South Africa. No South African studies have previously attempted to answer this question. The top 40 JSE listed companies were selected as the research sample and the relationship between different categories of EPS and share prices was analysed empirically for the period 2005 to 2013. This study demonstrated that basic EPS correlated best with the changing behaviour of share prices. Furthermore, the study established that headline EPS proved to deliver lower correlation coefficients than other EPS categories. Based on the findings of this study some useful recommendations and areas for further research were also identified.