South African Firms Research Articles

Does Mandatory Ifrs Adoption and Macroeconomic Factors Affect Cost of Equity Capital? Empirical Evidence From South African Listed Firms

Purpose: This paper investigates the collaboration of International Financial Reporting Standards (IFRS) adopted and macroeconomic variables interaction with information asymmetry, analysts following and managerial opportunism affecting the cost of equity capital, and also influence investor’s decision taking on companies in South Africa.
 Design/Approach: A sample of 49 listed Johannesburg mining and manufacturing firms was extracted from archival database of INET BFA/IRESS SA, Morningstar, and Anupedia. A leverage fixed effects panel data set of firms from 2001 to 2014 was examined, which shows that Breusch-Lagrange Multiplier tests and the test of over-identifying restrictions used, form the basis of the content analysis of the most recent IFRS effect after mandatory adoption. We used a hand-collected dataset between 2000 and 2015.
 Findings: Our findings suggest that a significant association is found between IFRS and its interactions with managerial opportunism and integrity but with a reasonable statistical effect. However, the IFRS adoption effect on the cost of equity capital of South African firms’ has no significant effect.
 Practical implications: This study reveals that most firms report more, the credibility of annual financial statements which may not be sufficient because of the qualitative data for an assessment of managerial opportunism, information asymmetry and analysts following. Of such myopia of company managers, their reputation causes agency problems and as a result, shareholders interest is mainly focused on improving reporting standards
 Originality: The research considers dual harmonizing facets: first, that the interaction with IFRS adoption and economic factors impact on the cost of equity capital may be so pathetic and obvious; and second, that IFRS moderation impacts on the cost of equity capital in Sub- Saharan African. This finding should be meaningful to managers, analysts, policymakers, and supervisory bodies in nations with similar capital structure decisions and socioeconomic systems.

The adoption of international sustainability and integrated reporting guidelines within a mandatory reporting framework: lessons from South Africa

PurposeThis study aims to explore factors influencing voluntary adoption of international sustainability and integrated reporting guidelines within a mandatory reporting framework. Given South Africa’s political history, the authors argue that accounting practice can be used to secure the legitimacy and transparency of businesses.Design/methodology/approachTwo logistic regression equations are used to predict the likelihood of firms’ subscribing to either Global Reporting Initiative (GRI) or the Integrated Reporting (<IR>) framework, respectively. The authors consider annual, sustainability and integrated reports issued for the financial year ended 2014.FindingsThe results show a statistically and significant positive association between the adoption of the GRI’s guidelines and the level of transparency of non-financial disclosures and environmental sensitiveness. The application of the <IR> framework is also associated with the level of a firm’s transparency score and with its respective analyst following, which acts as a measure for capital markets requiring a high information environment.Originality/valueThis paper illustrates the development of integrated and sustainability reporting (SR) practices within an emerging market. By drawing distinctions between locally developed South African codes of corporate governance, namely, King I-III and international guidelines proxied by the GRI’s guidelines for SR, and the <IR> framework, the authors show that South African firms still adopt international guidelines despite the mandatory framework in place.

The Impact of Perceived Work Complexity and Shared Leadership on Team Performance of IT Employees of South African Firms

ABSTRACTThis article investigates how work complexity, as perceived by Information Technology (IT) employees, influences team performance, and examines the role played by shared leadership. The findings of this study that collected data from 204 IT employees in South Africa show that perceived work complexity negatively predicts team performance while shared leadership negatively predicts perceived work complexity and positively predicts team performance.

Corporate effective tax rates: An exploratory study of South African listed firms

The corporate effective tax rates (ETRs) of South African firms listed on the Johannesburg Stock Exchange (JSE) were examined for the period 2009 to 2017 to determine if there were any changes over this period. The study further investigated the determinants of the corporate ETRs at firm level for the same firms. Determinants which could possibly affect the ETR were identified based on theories established as well as firm characteristics, such as size, leverage, capital and inventory intensity, and profitability. Panel data of 38 firms (342 firm-years) were obtained from the IRESS database in respect of these variables. The data were then analysed using the random effect model. Empirical results indicate that the corporate ETRs of South African JSE-listed firms do not differ considerably from the corporate statutory tax rate. Although the findings show that more profitable and capital-intensive firms engage in tax strategies that result in lower ETRs, only a small portion of the variance in ETRs can be explained. In general, it can be concluded that the levying of corporate income tax in South Africa appears to be fairly neutral and tax incentives are not significantly influential on the corporate ETR.

Age Matters: The Contingency of Economic Distance and Economic Freedom in Emerging Market Firm\u2019s Cross-Border M&A Performance

The primary studies on emerging market multinational firms (EMFs) thus far have depicted a picture of accelerated internationalization in which EMFs conduct a series of aggressive cross-border acquisitions to further enhance their competitive advantage. However, it is not clear whether the EMFs which conducted the acquisitions at a young age experience better performance. EMFs constrained by their home market development in economic institutions may encounter different challenges in their cross-border acquisitions. Using a sample of South African firms’ acquisitions between 1994 and 2012, we find support for the benefit of foreign acquisitions at a young age as well as the moderation effects of economic distance and economic freedom. While early inorganic growth provides an excellent opportunity to propel South African firms’ growth, the country level factors present important boundary conditions to examine the benefit of early internationalization. While facing a significant economic distance, older firms are better at utilizing their experience and experience better post-acquisition operating performance. By contrast, the younger firms benefit more from the post-acquisition when the home country has weaker economic freedom.

Mergers and executive compensation changes: Evidence from African markets

This study examines the impact of mergers and acquisition deals on various executive pay schemes and factors that drive these pay rise in Africa from 2002 to 2016. We find that executives of African acquiring firms are rewarded significantly for carrying out successful M&A deals in the year of merger. Besides, pay rise is strongly impacted by the size of the deal across all various forms of executive pay. We also find that pay increases are high for executives who acquire private targets but no evidence was found to support the impact of domestic acquisitions. South African executives are rewarded more based on the market perception of the deal quality. Increase in compensation is not affected by industry classification, diversification and international operation, cross-listing and mode of payment, although there is evidence of the influence of equity mode of payment for the South African market. Further, we distinctively examine the impact of corporate governance factors on pay rise and observe that firms with larger outside board of directors’ representation negatively determine executive total pay and there is no evidence that CEO’s age and gender influence executive pay. However, the experience of the CEO has a very high positive influence on the level of compensation for only South African firms.

Linkages and Spillover Effects of South African Foreign Direct Investment in Botswana and Kenya

In recent decades, the impact of South African foreign direct investment in Africa has been captured by research and policy. This paper investigates linkages and spillover effects of South African foreign direct investment in Botswana and Kenya. The study uses primary data to investigate qualitative implications. The findings reveal that South African firms operate in sectors including retail, food-processing, and information and communication technology. Linkages forged in these sectors include supply, employee, joint venture, service, and institutional nexuses. Supply and service linkages create observable spillovers which point to the fact that younger local firms tend to benefit from South African firms in terms of technology transfer and training opportunities. Host country policymakers are therefore encouraged to provide favourable incentives for foreign direct investment to promote entrepreneurship. Other policy implications are also discussed.

Corporate governance mechanisms and risk-taking in South Africa

This study examines the relationship between the quality of corporate governance score and the risk-taking behaviour of firms using data from 120 companies listed on the Johannesburg Stock Exchange (JSE) from 2010 to 2016. More specifically, this study analyses the way in which: 1) compliance to corporate governance; 2) percentage of non-executive directors on the board; 3) total number of board members; 4) percentage of debt; 5) firm size affect risk-taking behaviour in South African firms. Using a dynamic panel data regression model, the research found that corporate governance score and leverage are significant and negatively related with risk. This contradicts prior studies in other markets. Furthermore, the percentage of NEDS, board size and firm size, though positively related, were found to be insignificant risk factors. This can have useful implications for managers in assessing risk behaviour of South African firms.

Determinants of Innovation in Small Manufacturing Firms: Evidence from the South African Business Innovation Survey

The purpose of this paper is to investigate the factors that influence innovation activities in small manufacturing sector firms. The constructs employed in this paper are assembled into general firm characteristics, organizational structure, firm strategies, and sectoral conditions and relations categories. This study uses 138 responses from small South African firms as contained in the Community Innovation Surveys styled fifth national South African innovation survey, conducted between 2010 and 2012. Appropriate hypotheses were derived and tested by multivariate probit regression analysis. The results show the positive influences of the firm’s age and size by number of employees, a mix of linkages to internal and external knowledge sources, investment in (a) formal R&D department in plant, (b) investment in R&D intensity and (c) a skilled workforce, foreign ownership and government support on the propensity to innovate. Some knowledge source linkages, size of the firm by turnover and the size of the degreed workforce show a negative influence. The generalisability of the findings may be limited by the fact that the present study was focussed on small manufacturing sector firms that responded to the fifth national South African innovation survey. Prior South African studies on the determinants of innovations were based on the first and second national innovation surveys. The findings of this study offer a more recent insight into innovation strategies in small firms. Finally, very little is known about the innovation activities in small firms in Sub Saharan Africa in general, and South Africa specifically. A further implication of this study is that the findings also help stakeholders consider a variety of relationships that are likely to improve the innovation performance of small firms are suggested and discussed.

Employment and wage premiums in South African manufacturing exporters: Firm-level evidence

ABSTRACTSouth Africa is currently suffering from high unemployment. As export activity is generally associated with higher economic growth, productivity, employment levels and wages, this papers investigates if increasing export activity is one of the solutions to the high unemployment levels in South Africa. By using newly made available administrative data on the population of South African firms, this paper aims to deepen the understanding of the wage premium, employment premium and employment growth of exporters relative to non-exporters (as well as within exporters). By following the methodology of Bernard and Jensen, the results show that South African manufacturing exporters do have an employment premium and wage premium. But advocating increased export activity is not enough, as exporting firms are heterogenous. Furthermore, employment growth of exporters (measured by estimating first-difference regressions) is faster than non-exporters, but growth in jobs is skewed towards higher skilled, more experience workers.

South African manufacturing firms in transition

ABSTRACT We seek to provide a more detailed understanding the dynamics of change of firms in the post-apartheid era through the examination of the results of two firm-level surveys in the eThekwini Metro area. This paper aims to fill a gap in the South African labour market literature: our understanding of the demand side of the labour market. We examine the characteristics of firms which have grown their employment in order to test the local application of firm and labour market theory. An important finding is that subcontracting matters for employment growth. Those firms in the sample that outsource aspects of production to subcontractors are more likely to have grown employment. The flexibility that subcontracting provides, in terms of responding to changes in workload, is one of the key reasons that firms engage in subcontracting. There are some plausible hypotheses as to how this relationship works. First, subcontracting allows firms to outsource lower-skilled work, and achieve the scale necessary to employ high-skilled full-time staff. Second, subcontracting allows the firms to access high-skilled individuals that they would otherwise not have the operational scale to retain on a full-time basis. We also examine the role of exporting and value chain integration in employment creation.

Surviving in the BRICS: the struggle of South African business in coping with new partners and investors

ABSTRACT The purpose of this paper is to improve our understanding of how South African economic actors react to the gradual entry of non-South African BRICS firms in their established business areas. Throughout the twentieth century, South Africa’s trade and investment activities were conducted overwhelmingly with Western countries. However, the end of apartheid coincided with significant shifts as new players had a wider and growing presence. South Africa entering the BRICS alliance is symbolic of the change. Ease of entry into the South African economy has increased greatly. South African businesses in key subsectors in the mining and capital equipment industry have had to adapt to new players, and find space in new structures, value chains and initiatives. This paper presents the results of this research activity from the perspective of the South African political economy. Practice-oriented research investigated how six local companies forge new partnerships and how well South African firms adapt and cope with an altered and often unstable environment. It assumed that entrepreneurial activity is not autonomous but takes place within a larger organisational framework. Entrepreneurial activity facilitates the effective exploitation of particular niches and relationships with service providers.

Corporate social responsibility and financial performance nexus

PurposeThe paper aims to investigate empirically the impact of corporate social responsibility (CSR) on financial performance in South African listed firms.Design/methodology/approachThe paper uses panel corrected standard errors to estimate the effect of CSR on firm financial performance and thus addresses contemporaneous cross-correlations across the panel cross sections. The study uses a broad base measure of CSR created by the Public Investment Corporation data set and the combination of accounting and economic means of measuring firm financial performance.FindingsCSR is found to have a strong positive impact on firm financial performance in South Africa. When CSR is decomposed further into its major components, governance performance positively impacts a firm’s financial performance with no evidence of any relationship between social components and firm performance and between environmental components and firm performance. The positive impact of CSR on firm performance is greater in big firms. At the industry level, CSR is noticed to impact positively on financial performance in the extractive industry via good governance and responsible environmental behaviors. It however has no impact on firm performance in the financial sector.Research limitations/implicationsThe results should be interpreted with caution and some limitations. Due to the limiting nature of the Public Investment Corporation data set (the survey was carried out on selected firms on the Johannesburg Stock Exchange for three years spanning from 2011 to 2013). This resulted in a sample of 56 firms. It is therefore very problematic to generalize the findings to a larger population over a long period of time. This is more limiting especially on individual sector studies where the sample has further shrunk to a smaller sample. As a result of the smaller sample size, the authors were unable to explore some other sectors which could have given more revealing findings. The authors recommend that future research should explore other data sets or use primary data approach that can allow for more sample size and elongated time period for a more holistic view and for easy generalization of the findings. The authors also identify an important lacuna necessitating further research effort. It would be interesting to empirically examine the threshold point of firms’ size beyond which CSR damages firms’ performance. Knowledge of this will guide managers of firms in their strategic CSR decision.Practical implicationsThis study does not only serve as a reference work for subsequent investigations into the impact of CSR on firm performance in sub-Saharan Africa but also serves as a guide to policymakers on the financial impact of CSR adoption.Originality/valueThis study is one of the pioneering works that comprehensively examines the effect of CSR on financial performance amongst South African firms via size and sector and also controls for contemporaneous cross-correlation effects from the firms in the panel set.

The association between corporate social responsibility reporting and firm value for South African firms

Background: Corporate social responsibility (CSR) disclosure is widespread among the largest companies in South Africa due to the listing requirements of the Johannesburg Stock Exchange (JSE). These companies have also increasingly pursued external assurance of their CSR disclosures in recent years. The increased regulation of CSR disclosure and the increased rate of obtaining assurance of these disclosures motivated us to perform our study.Aim: To examine the association between CSR reporting, including both CSR disclosure and CSR assurance, and firm value of large South African companies.Setting: The JSE listing requirements place South Africa, the setting for our study, at the forefront of corporate governance and CSR reporting.Method: Tobin’s Q is used as a measure of firm value. Three measures of CSR disclosure and three of CSR assurance are used in this study. The measures are based on data collected by Klynveld Peat Marwick Goerdeler (KPMG) International on the CSR reporting practices of large South African companies. The sample period for this study coincides with the sample period covered in the KPMG surveys conducted during 2008, 2011 and 2013.Results: No significant association is found between CSR disclosure and firm value. However, a significant negative association is found between CSR assurance and firm value. Additional analysis found that the negative association between firm value and CSR assurance is more significant for companies that are not listed on the Socially Responsible Investment (SRI) index.Conclusion: The results found between CSR disclosure and firm value may suggest that firm value is unaffected by CSR disclosures. Taken together, the findings on CSR assurance and firm value and the additional analysis may suggest that in South Africa managers with negative CSR issues are more likely to obtain assurance on their CSR disclosure. The findings may be of interest to regulators when considering current and future disclosure and assurance requirements for CSR reporting in South Africa, as well as other parts of the world, shareholders when considering investment options, and managers when considering the benefit of certain CSR reporting practices.

The global value chain dimension of foreign direct investment flows in the agro-industrial sector of South Africa, 2003–2014

Orientation: African countries offer many investment opportunities and also urgently need global investment finance. Along the value chains of the agro-industrial sector there are many global challenges for African countries to attract foreign direct investment. This article investigates the investment flows in agro-industries and products to and from South Africa.Research purpose: This study evaluates the nature and dimensions of the agro-industrial sector that receive investment inflows in South Africa, as well as investigating South African investment patterns into Africa.Motivation for the study: Of particular interest is the relationship between foreign direct investment (FDI) flows, their integration into global value chains and sustainable investment options.Research design, approach and method: Qualitative data and visual techniques using available data for the period 2003–2014 disambiguate the linkages in FDI patterns with regard to regions, industries and specific companies. Flows between regions and the specific companies are identified and studied.Main findings: The results indicate that the United States, the United Kingdom and the Netherlands are the largest investors in South Africa, with a strong focus on agricultural input production and subsequent agro-processing industries. South African investment into Africa follows a similar, albeit narrower and more focused, pattern. The study concludes that foreign multinational enterprises are actively involved in global value chain expansion and South African firms are following suit.Practical/managerial implications: The lack of FDI in actual agricultural crop production in Africa offers future investment opportunities.Contribution/value-add: This study creates a better understanding of how FDI in agriculture is linked to the development of regional value chains in the Southern African region. The methodology applies a novel approach to an important field of study, of which little knowledge exists, and may contribute to the creation of wealth in the countries of the region and the welfare of its population.

The Impact of Carbon Emissions on Corporate Financial Performance: Evidence from the South African Firms

The impact of carbon emissions on corporate financial performance within the African corporate setting has remained open and inconclusive, owing primarily to the unavailability of data. However, this paper examines the effect of carbon emissions (Scope 1, Scope 2, and Scope 1 and 2) on the financial performance (ROE, ROI, and ROS) of 63 South African CDP companies for the 2015 fiscal year. Using multiple regression techniques, the paper found overwhelming evidence of a negative relationship between carbon emissions and corporate financial performance. Thus, results indicate that companies which integrate green investment initiatives designed to lower carbon emissions can effectually manage financial performance. Therefore, the paper provides useful insights on how companies can fully utilise their organisational resources and capabilities as well as gain insight, resulting in a higher environmental and financial performance within a firm.

The impact of leverage on investment decisions for South African firms with different growth opportunities

Research has documented a significant relationship between financial leverage and investment decisions, however divergent views exist about whether this relationship is explained by the underinvestment hypothesis or the overinvestment hypothesis. This study examines the relationship between financial leverage and investment decisions for firms with different growth opportunities, it is based on a sample of 51 industrial sector firms listed on the Johannesburg Stock Exchange (JSE), South Africa, over the period from 2008 to 2014. Using panel data and after controlling for heterogeneity across firms, we report a negative relationship between leverage and investment. However, the relationship is significant for firms with high growth opportunities and insignificant for firms in the low growth category. The results support the underinvestment theory that debt overhang reduces the incentives of firms exploiting valuable opportunities.

The impact of operating leverage on the capital structure of Johannesburg Stock Exchange-listed firms before and after the 2008 global financial crisis

The financial leverage-operating leverage trade-off hypothesis states that as financial leverage increases, management of firms will seek to reduce the exposure to operating leverage in an attempt to balance the overall risk profile of a firm. It is the objective of this study to test this hypothesis and ascertain whether operating leverage can indeed be added to the list of factors that determine the capital structure of South African firms. Forty-six firms listed on the Johannesburg Stock Exchange between 1994 and 2015 are analysed and the impact of operating leverage is determined. The results are split into two periods, that is, the period before the global financial crisis (1994–2007) and after the global financial crisis (2008–2015). The impact of operating leverage during these two periods is then compared to determine whether a change in the impact of operating leverage on the capital structure can be observed especially following the crisis. The results show that the conservative nature of South African firms leading up to 2008 persisted even after the global financial crisis. At an industry level, the results reveal that operating leverage does not have a noticeable impact on capital structure with the exception of firms in the industrials sector of the South African economy.

A Practical Approach To Estimating The Cost Of Equity For South African Firms Undertaking Cross-Border Investments

Corporate finance literature has developed a number of models for use in estimating the cost equity in for cross-border investments. Most of the models, if not all, are specifically developed for use by US firms investing in emerging markets. The widely used models are the home country CAPM, the local CAPM, the country-risk adjusted CAPM or the Lessard model, the Godfrey-Espinosa model, the Goldman Sachs model, the Gamma model and the SalomonSmithBarney model. Using a hypothetical case study of FirstRand Limited’s proposed investments in Ireland and Turkey, this study tests for the suitability of the reverse-engineered versions of these models in estimating the cost of equity for a South African firm planning to invest in both Ireland (developed country) and Turkey (emerging country). The results of the study indicate that the Godfrey-Espinosa the Goldman-Sachs models are equivalent. The Lassard model is equivalent to the Gamma or Damodaran mode, and both models yielded estimates closer to the SalomonSmithBarney model. All the models’ estimates for the Turkish investment are consistent with the credit ratings of both Turkey and South Africa. The cost equity estimates show that FirstRand Limited investors will demand an additional risk premium for investments in Turkey. The cost of equity estimates for the Irish investment are mixed, inconsistent with the Ireland’s credit rating and had a higher standard deviation than the estimates for the Turkish investment. The Irish estimates seem to be largely affected by the country’s high country and banking industry betas. The reverse-engineered versions of these models are suitable for use by firms in emerging countries.

Institutions and the location strategies of South African firms in Africa

This study explores the influence of institutions on the location strategies of firms in Africa. Specifically, the research examines the effect of governance infrastructure, a country's overall public institutions and policies, on the expansion strategies of three South African firms as they entered selected African countries between 1996 and 2015. These firms include SABMiller, MTN, and Massmart. The study makes use of structured interviews with senior directors of the three firms, mini case studies, and the World Bank's Worldwide Global Governance Indicators, in an effort to understand the impact of institutions, or lack thereof, on these companies’ location choices. Results suggest that by and large, the quality of formal institutions did not have a direct effect on the location decisions of the three firms in this study, and that these firms found ways to mitigate the so‐called institutional voids.