Determinants of Cash Distribution Options in South African Listed Firms: An Empirical Analysis of Earnings, Company Size, and Economic Value Added

Abstract

The purpose of this study was to examine the determinants of cash distribution options by critically considering the effects of earnings, dividends, firm size, and economic value added. The distribution of cash dividends to shareholders serves as a basic means by which shareholders receive returns on their investments, so it is essential to examine share repurchases alongside dividends to enhance management’s efforts in maximising shareholder value. This study utilised panel data from 52 companies listed on the Johannesburg Security Exchange (JSE) that engaged in open market share repurchases for at least 2 years between 2000 and 2019. The data were extracted from the IRESS database. The panel data regression model was fitted with the ordinary least squares (OLS), difference generalised moment method (Diff-GMM), system generalised moment method (Sys-GMM), and least-squares dummy variable correction estimator (LSDVC). The findings revealed that there was a positive and significant relationship between the earnings per share and the payoff flexibility, implying that there was an inherent flexibility of repurchases as a payout option in the sampled firms. Additionally, the study revealed a significant negative relationship between the firm size, economic value added, and payoff flexibility. This suggests that larger companies tend to distribute a lower proportion of their earnings as share repurchases and opt for higher cash dividends instead. The implications of these findings provide financial managers with valuable insights into the role of share repurchases as a cash distribution choice. By recognising share repurchases as a viable option, financial managers can enhance their efforts to create and maximise shareholder value, particularly in emerging market settings. This evidence should encourage financial managers to recognise share repurchases more as a distribution choice, diffusing the tension regarding share repurchases replacing the payment of cash dividends and some doubt that they may not possess attributes complimentary to cash dividends. The study recommended relevant academic, industry, and policy implications in the South African context.