The long-term share price reaction to Black Economic Empowerment announcements on the JSE

Abstract

Black Economic Empowerment has been one of the South African government's primary mechanisms for addressing the economic imbalances of the apartheid era. Voluntary sector "charters", and more recently legislation, have required largely white owned business enterprises to become more inclusive across key areas of economic empowerment, including the provision of minimum levels of ownership for black shareholders. This research employs event study methodology to examine the long-term impact on the share prices of listed companies after announcements are made relating to black empowerment deals which impact equity ownership. The research examines 118 announcements and finds a positive cumulative abnormal return of around 10% after the first year. The positive result is confined to smaller companies, with market capitalisation of less than R3,5bn, whilst large companies experience a marginally negative cumulative abnormal return. The results also show that those companies which made BEE announcements prior to May 2005 ('first-movers') did somewhat worse than those who followed. Finally, the results were found to be consistent for companies making further BEE related announcements, although the cumulative abnormal returns were lower at around 6%.

Market reaction to tender and private offers on the JSE

“…Although event studies typically focus on relatively short time periods, Ward and Muller (2010) argue that the use of a more sophisticated model to estimate the ARs is significantly superior to the conventional CAPM or market models, in that the 12 control portfolios take account of so-called style effects, including the size and value effects and the resources/non-resources dimension, known to be present on the JSE. Furthermore, the methodology of this study of constructing a bootstrap distribution of CARs across the full time-series, allowed the researchers to perform suitable significance tests for the hypotheses of this study.…”

“…Owing to the non-normal return distributions generally associated with event studies, a non-parametric test to measure significance is appropriate (Ward & Muller, 2010). In the present study a bootstrapping process was used to test ARs and CARs for significance (Noreen, 1989).…”

“…Similarly, the share price returns of newly listed shares were included in the following quarter, when the control portfolios were rebalanced. Abnormal returns (ARs) for each share could then be estimated using the multiple regression equation described in Ward and Muller (2010) and Wesson et al (2014). The performance was calculated over an extended period by accumulating the average ARs to obtain the cumulative abnormal return (CAR) for each share, over the event window period.…”

“…A 12-parameter-style model to estimate benchmark returns was therefore used in this study. Following Mordant and Muller (2003), Mutooni and Muller (2007), and Ward and Muller (2010), 12 control portfolios of shares representing the cross-sectional factors of size (based on market capitalisation), growth/value (based on P/E ratios), and resources/non-resources were constructed, and betas for each share in the sample were estimated against these. The control portfolios were rebalanced for every quarter to ensure that changes in share characteristics (market capitalisation, P/E ratios, new listings and delistings, etc.)…”

The impact of regulatory fines on shareholder returns

“…We follow the methodology of Ward and Muller (2010), who published research findings pertaining to the impact of Black Economic Empowerment (BEE) announcements by specific companies listed on the JSE. Event studies require the estimation of abnormal returns (ARs), typically on a daily basis.…”