Value relevance of financial statements of non-financial firms listed on the Johannesburg Stock Exchange.

Abstract

The year 2010 marks a full calendar year after the 2007-2009 global financial crisis (GFC). The GFC was characterised by huge losses across all equity indices on the Johannesburg Stock Exchange (JSE). The losses were not entirely commensurate with the operating performance of listed companies, as reported in their financial statements. While general negative sentiment associated with the GFC was a major driver of the mismatch between firm performance and share price movements on the JSE during the GFC, continued mismatches witnessed in the post-crisis period (2010-2017) raise questions regarding the usefulness of financial statements in explaining share price movements. This research examines value relevance of tangible book value, EBIT from continuing operations, firm size, financial risk, cash dividends, and retained earnings, using a dynamic panel dataset. The population comprises of all non-financial firms listed on the JSE that were active for the entire 2010 to 2017 study period, excluding new listings and de-listings during the period. Purposive sampling from all eligible industry sectors of the JSE was used, where the number selected from each industry was based on the total number of eligible firms in that industry, the population size and the sample size. Based on a population size of 200 firms, 50 were sampled for this research. Value relevance was determined by statistical significance of each financial statement variable, where lack of statistical significance means a variable is not value relevant. Two-step System Generalised Method of Moments (System GMM) was used in this study’s regressions. The dependent variables are firm value and share prices, where firm value is measured by market capitalisation, enterprise value and Tobin’s Q. EBIT was found to be value relevant regardless of the measure of firm value used while, on the other hand, book value is not value relevant. Firm size was found to have no significant effect on share price movements. Influence of a small firm’s discount on share prices of small companies is one of the original contributions of this study. Total debt and debt/equity ratio are the two measures of financial risk used and the debt ratio was found to be value relevant regardless of a firm’s risk category. Value relevance of total debt is contingent upon a firm’s risk category, leading to a high debt illusion, which is another original contribution of this study. Cash dividends and retained earnings were found to have no impact on firm value, which was measured by market capitalisation and Tobin’s Q. Findings in this study inform the decisions of company executives, equity investors, investment analysts, accounting standards setters, and other policy makers.