Investor short-termism on the Johannesburg Stock Exchange
Date
2023-12
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Stellenbosch : Stellenbosch University
Abstract
ENGLISH SUMMARY: Participants in global financial markets appear to be placing increased pressure on corporate managers to prioritise short-term results. When managers are pressurised into focusing on shortterm financial performance, the actions required to ensure the long-term sustainability of a company might be deferred or overlooked. Barton (2011) argued that the capital markets are experiencing an era of quarterly capitalism, where the nearly continuous release of new information has contributed to a shift in market participants’ focus from the long-term sustainability of a company to its short-term share performance. Traditional finance theory assumes that markets operate efficiently, and that market participants have access to perfect information which allows them to make decisions in a rational manner. Under traditional assumptions, market prices accurately reflect a share's intrinsic value. However, volatile market conditions and numerous market anomalies may suggest the opposite. Behavioural finance theory attempts to explain this by examining behavioural biases such as short-termism, often displayed by investors when making intertemporal investment decisions. When accentuated by herding, myopic preferences could have a significant impact on asset valuation models. Short-termism occurs when investors overvalue short-term returns by applying higher discount rates to more distant cash flows. This disproportionate discounting might result in market prices deviating from their intrinsic values. This problem might be further compounded when corporate managers also prioritise short-term cash flows, possibly resulting in underinvestment in future, long-term fundamental value-generating projects. The results of previous studies (Haldane and Davies, 2011; Miles, 1993; Chou and Guo, 2004) have indicated that investors in the United Kingdom (UK) and the United States (US) exhibited shorttermism. The authors found that the discount rates applied to shares were adjusted to overvalue near-term cash flows and undervalue long-term returns. Whereas these studies have investigated the presence of short-termism in developed countries, only limited research has been conducted on the phenomenon in developing countries. The primary objective of this study was to investigate investor short-termism in South Africa from 1995 to 2014. The sample of the study included companies that had been listed on the Johannesburg Stock Exchange (JSE) from 1995 to 2014. The regression model employed included five years of lagged and future variables for each company considered. Therefore, the data were collected within the timeframe from 1990 to 2019. In order to provide five years of lagged and future values, companies were required to publish the necessary data continually for 11 years. The resulting sample consisted of 280 companies and 3 577 company-year observations. To assess for changes over time, the sample was divided into two ten-year subperiods over the study period. The sample was also divided between sectors to investigate short-termism in companies operating in different industries. Multiple regression analyses were used to test for short-termism in the sample. The regression model employed was based on a theoretical model developed by Davies, Haldane, Nielsen and Pezzini (2014). The regression model was estimated using the Generalised Method of Moments (GMM) estimation method. The Wu-Hausman endogeneity test, Sargan’s test for overidentifying restrictions and the Cragg-Donald weak instrument test were used as diagnostic tests to determine the suitability of the GMM estimation method for the current study. The results of the study indicated that investors in JSE-listed companies exhibited significant levels
of short-termism over the study period, the degree of which was found to have increased over time, with statistically significant evidence of sustained short-termism found in the final decade of the study period. When considered at a sector level, investors in the basic materials sector were found to have exhibited the highest levels of short-termism among the four applicable sectors in the study. To reduce short-termism in South Africa, the researcher recommends that managers adopt a corporate culture that promotes long-termism, discourage quarterly reporting, structure executive remuneration to facilitate long-term financial performance and offer enhanced shareholder participation rights to long-term investors. Furthermore, investors are encouraged to exercise stewardship and provide executives with investor mandates that prioritise sustainable investing. The government is also encouraged to adjust capital gains tax to reward long-term share ownership, promote short-termism awareness through improved financial literacy programmes in curriculums and enhance or modify fiduciary duties of financial intermediaries to align the long-term interests of stakeholders.
AFRIKAANSE OPSOMMING: Geen opsomming beskikbaar.
AFRIKAANSE OPSOMMING: Geen opsomming beskikbaar.
Description
Thesis (MCom)--Stellenbosch University, 2023.