M.Comm.

A research report submitted In partial fulfilment of the degree Master of Commerce (Accounting) University of the Witwatersrand / This research report evaluates the nature of, and gathers evidence of, the potential misuse of the non-GAAP 'adjusted earnings' by JSE-listed firms in South Africa. The prior literature is explored and applied to the South African context which is a unique environment due to the mandatory use of the non-GAAP Headline Earnings . The prior literature provides the grounding for the research methods which enhance the validity of the study. Adjusted earnings are analysed through 3 research questions and sub-questions. The first research question focuses on the nature of the use of adjusted earnings in South Africa, by examining the extent of use of adjusted earnings by a population of JSE firms, as well as the most common types of adjustments used. It is evaluated using descriptive statistical methods from data from databases and company annual financial reports. Research question 2 gathers evidence for misuse through the identification of 'valid' and 'invalid' adjustments made in the determination of adjusted earnings, as well as the identification of the repeated use of particular adjustments, which are indicators of misuse from the prior research of Bhattacharyaa, Black, Christensenb and Larsonc (2003) and Doyle, Lundholm and Soliman (2003). This question uses an ANOVA and repeated measure approach respectively using the same data from research question 1. The third research question examines whether there is an association between adjusted earnings and whether firms meet or beat analyst earnings forecasts more often (the dependent variable) as set out in Doyle, Jennings and Soliman (2013). This is assessed using logistic regression analysis using analyst earnings forecast data and company results data The results indicate that types of firms and adjustments made in South Africa are similar to U.S. literature. It raises questions around use of adjusted earnings as a performance metric and the use of Headline Earnings in South Africa. Evidence of misuse of adjusted earnings was found. In addition, a strong relationship similar to the Doyle et al. (2013) findings was found between the use of upwardly adjusted earnings and the propensity of firms to meet or beat analyst forecasts. Whether a firm s accounting earnings met or beat the forecast was also found to have significant influence on the dependent variable. It was also found that South African firms met or beat analyst forecasts significantly less often than U.S. firms, suggesting that there may be structural differences in the analyst forecasts environment in South Africa when compared to the U.S. The results suggest that adjusted earnings may be misused in South Africa, and one of the motivations to do so is to meet or beat analyst earnings forecasts. / MT2017

Thesis (PhD)--Stellenbosch University, 2014. / ENGLISH ABSTRACT: The practice of combining single-factor multiples (SFMs) into composite multiples models is underpinned by the theory that various SFMs carry incremental information, which, if encapsulated in a superior value estimate, largely eliminates biases and errors in individual estimates. Consequently, the chief objective of this study was to establish whether combining single value estimates into an aggregate estimate will provide a superior value estimate vis-á-vis single value estimates. It is envisaged that this dissertation will provide a South African perspective, as an emerging market, to composite multiples modelling and the multiples-based equity valuation theory on which it is based. To this end, the study included 16 SFMs, based on value drivers representing all of the major value driver categories, namely earnings, assets, dividends, revenue and cash flows. The validation of the research hypothesis hinged on the results obtained from the initial cross-sectional empirical investigation into the factors that complicate the traditional multiples valuation approach. The main findings from the initial analysis, which subsequently directed the construction of the composite multiples models, were the following: Firstly, the evidence suggested that, when constructing multiples, multiples whose peer groups are based on a combination of valuation fundamentals perform more accurate valuations than multiples whose peer groups are based on industry classifications. Secondly, the research results confirmed that equity-based multiples produce more accurate valuations than entity-based multiples. Thirdly, the research findings suggested that multiples models that are constructed on earnings-based value drivers, especially HE, offer higher degrees of valuation accuracy compared to multiples models that are constructed on dividend-, asset-, revenue- or cash flowbased value drivers. The results from the initial cross-sectional analysis were also subjected to an industry analysis, which both confirmed and contradicted the initial cross-sectional-based evidence. The industry-based research findings suggested that both the choice of optimal Peer Group Variable (PGV) and the choice of optimal value driver are industry-specific. As with the initial cross-sectional analysis, earnings-based value drivers dominated the top positions in all 28 sectors that were investigated, while HE was again confirmed as the most accurate individual driver. However, the superior valuation performance of multiples whose peer groups are based on a combination of valuation fundamentals, as deduced from the crosssectional analysis conducted earlier, did not hold when subjected to an industry analysis, suggesting that peer group selection methods are industry-specific. From this evidence, it was possible to construct optimal industry-specific SFMs models, which could then be compared to industry-specific composite models. The evidence suggested that composite-based modelling offered, on annual average, between 20.21% and 44.59% more accurate valuations than optimal SFMs modelling over the period 2001 to 2010. The research results suggest that equity-based composite modelling may offer substantial gains in precision over SFMs modelling. These gains are, however, industry-specific and a carte blanche application thereof is ill advised. Therefore, since investment practitioners’ reports typically include various multiples, it seems prudent to consider the inclusion of composite models as a more accurate alternative. / AFRIKAANSE OPSOMMING: Die praktyk om Enkelfaktor Veelvoude (EFVe) te kombineer in saamgestelde veelvoudmodelle word ondersteun deur die teorie dat verskillende EFVe oor inkrementele inligting beskik, wat, indien dit in ’n superieure waardeskatting opgeneem word, grootliks vooroordele en foute in individuele skattings elimineer. Gevolglik was die hoofdoel van hierdie studie om vas te stel of die kombinering van verskeie enkelfaktor waardeskattings in ’n totale waardeskatting ’n superieure waardeskatting sal verskaf vis-á-vis enkelfaktor waardeskattings. Dit word voorsien dat hierdie proefskrif ’n Suid-Afrikaanse perspektief, as ’n ontluikende mark, sal bied aangaande saamgestelde veelvoudmodellering en die veelvoud-gebaseerde ekwiteitswaardasie-teorie waarop dit gebaseer is. Hiermee ten doel, sluit hierdie studie 16 EFVe in, gebaseer op waardedrywers wat al die vernaamste waardedrywerkategorieë, naamlik verdienste, bates, dividende, omset en kontantvloeie, verteenwoordig. Die bevestiging van die navorsingshipotese is afhanklik van die resultate soos bekom vanuit die aanvanklike dwarsdeursnee-empiriese ondersoek na die faktore wat die tradisionele veelvoudwaardasieproses kompliseer. Die hoofbevindinge van die aanvanklike ontleding, wat daarna rigtinggewend was vir die komposisie van die saamgestelde veelvoudmodelle, was die volgende: Eerstens, dui die bewyse daarop dat, wanneer veelvoude saamgestel word, veelvoude waarvan die portuurgroepe op ’n kombinasie van fundamentele waardasieveranderlikes gebaseer is, meer akkurate waardasies lewer as veelvoude waarvan die portuurgroepe op industrie-klassifikasies gebaseer is. Tweedens, het die navorsingsresultate bevestig dat ekwiteitsgebaseerde veelvoude meer akkurate waardasies lewer as entiteitsgebaseerde veelvoude. Derdens, toon die navorsingsbevindinge dat veelvoudmodelle wat saamgestel word uit verdienstegebaseerde waardedrywers, veral wesensverdienste (WV), hoër grade van waardasie-akkuraatheid bied in vergelyking met veelvoudmodelle wat saamgestel word uit dividend-, bate-, omset- of kontantvloei-gebaseerde waardedrywers. Die resultate van die aanvanklike dwarsdeursnee-ontleding is ook onderwerp aan ’n industrie-ontleding, wat die aanvanklike bevindinge van die dwarsdeursnee-ontleding beide bevestig en weerspreek het. Die bevindinge vanaf die industrie-ontleding dui daarop dat beide die keuse van optimale Portuurgroepveranderlike (PGV) en die optimale keuse van waardedrywer, industrie-spesifiek is. Soos met die aanvanklike dwarsdeursnee-ontleding, het verdienste-gebaseerde waardedrywers die top posisies by al 28 sektore wat ondersoek is, gedomineer, terwyl WV weer as die akkuraatste individuele waardedrywer bevestig is. Die superieure waardasie-resultate van veelvoude waarvan die portuurgroepe gebaseer was op ’n kombinasie van fundamentele waardasie-veranderlikes, soos afgelei uit die aanvanklike dwarsdeursnee-ontleding, het egter nie dieselfde resultate gelewer op ’n per sektor basis nie, wat aandui dat portuurgroep seleksiemetodes industrie-spesifiek is. Vanuit hierdie bevindinge was dit moontlik om optimale EFV-modelle saam te stel, wat dan vergelyk kon word met industrie-spesifieke saamgestelde veelvoudmodelle. Die bevindinge het voorgestel dat saamgestelde modellering gemiddeld jaarliks, tussen 20.21% en 44.59% meer akkurate waardasies gelewer het as optimale EFVmodellering oor die tydperk 2001 tot 2010. Die navorsingsresultate dui aan dat ekwiteitsgebaseerde saamgestelde modellering aansienlike toenames in waardasie-akkuraatheid mag bewerkstellig bo dié van EFVmodellering. Hierdie toenames is egter industrie-spesifiek en ’n carte blanche toepassing daarvan is nie aan te beveel nie. Gevolglik, aangesien beleggingspraktisyns se verslae tipies verskeie veelvoude insluit, blyk dit redelik om die insluiting van saamgestelde modelle as ’n meer akkurate alternatief te oorweeg.

Thesis (PhD (Economics))--University of Stellenbosch, 2008. / The primary financial objective of a firm is the maximisation of its shareholders’ value. A problem faced by the shareholders of a firm is that it is difficult to determine the effect of management decisions on the future share returns of the firm. Furthermore, it may be necessary to implement certain monitoring costs to ensure that management is focused on achieving this objective. A firm would, therefore, benefit from being able to identify those financial performance measures that are able to link the financial performance of the firm to its share returns. Implementing such a financial performance measure in the valuation and reward systems of a firm should ensure that management is aligned with the objective of shareholder value maximisation, and rewarded for achieving it. A large number of traditional financial performance measures have been developed. These measures are often criticised for excluding a firm’s cost of capital, and are considered inappropriate to be used when evaluating value creation. Furthermore, it is argued that these measures are based on accounting information, which could be distorted by Generally Accepted Accounting Practice (GAAP). Studies investigating the relationship between these measures and share returns also provide conflicting results. As a result of the perceived limitations of traditional measures, value based financial performance measures were developed. The major difference between the traditional and value based measures is that the value based measures include a firm’s cost of capital in their calculation. They also attempt to remove some of the accounting distortions resulting from GAAP. Proponents of the value based measures present these measures as a major improvement over the traditional financial performance measures and report high levels of correlation between the measures and share returns. A number of studies containing contradictory results have been published. On the basis of these conflicting results it is not clear whether the value based measures are able to outperform the traditional financial performance measures in explaining share returns. The primary objectives of this study are thus to: • Determine the relationship between the traditional measures earnings before extraordinary items (EBEI) and cash from operations (CFO), and shareholder value creation; • Investigate the value based measures residual income (RI), economic value added (EVA), cash value added (CVA) and cash flow return on investments (CFROI), and to determine their relationship with the creation of shareholder value; • Evaluate the incremental information content of the value based measures above the traditional measures. The information content of the traditional measures and the value based measures are evaluated by employing an approach developed by Biddle, Bowen and Wallace (1997). The first phase of this approach entails the evaluation of the relative information content of the various measures in order to determine which measure explains the largest portion of a firm’s market-adjusted share returns. The second phase consists of an evaluation of the incremental information content of the components of a measure in order to determine whether the inclusion of an additional component contributes statistically significant additional information beyond that contained in the other components. The study is conducted for South African industrial firms listed on the Johannesburg Securities Exchange for the period 1991 to 2005. The data required to calculate the measures investigated in the study are obtained from the McGregor BFA database. This database contains annual standardised financial statements for listed and delisted South African firms. It also contains EVA, cost of capital and invested capital amounts for those firms listed at the end of the research period. Including only these listed firms in the research sample would expose the study to a survivorship bias. Hence these values are estimated for those firms that delisted during the period under review by employing a similar approach to the one used in the database. The resulting sample consists of 364 firms providing 3181 complete observations. Since different information is required to calculate the various measures included in the study, different samples are compiled from this initial sample and included in the tests conducted to evaluate the information content of the measures. The results of this study indicate that the value based measures are not able to outperform EBEI in the majority of the relative information content tests. Furthermore, the measures EVA, CVA and CFROI are also not able to outperform the relatively simple value based measure RI. The results from the incremental information content tests indicate that although some of the components of the value based measures provide statistically significant incremental information content, the level of significance for these relatively complex adjustments is generally low. Based on these results, the claims made by the proponents of the value based measures cannot be supported. Furthermore, if a firm intends to incorporate its cost of capital in its financial performance measures, the measure RI provides most of the benefits contained in the other more complex value based measures.

Abstracts in English, Zulu and Afrikaans / The stakeholder instrument (SI) is a conceptual framework developed to complement integrated reports for value creation, transparency and accountability. It is a tool developed specifically for stakeholders to have an understanding of the integrated reports and assist them in making informed decisions. Currently, integrated reports fail to provide meaningful insights into organisations’ performance and its strategy focus, thus making it difficult for stakeholders to understand the contents of the integrated reports. The research illuminated pertinent variables synonymous with value creation. The study involved analysis of data from 42 companies trading on the Johannesburg Stock Exchange and administration of 80 questionnaires on randomly selected respondents. Significant and positive correlations between value creation and the attributes namely integrated reports; corporate governance and financial measures were established. Contributions: The results of the empirical study provide significant perceptions into the process of stakeholder value creation. The study established the significance of complementing the integrated reports in creating stakeholder value. The study, further, authenticated the stakeholder instrument as a distinct antecedent of value creation. The study further illuminated the attributes that matter to the stakeholders and assist with effective decision-making and value creation. / Ithuluzi lababambiqhaza wuhlaka olwenzelwe ukweseka nokuthasisela phezu kwemibiko edidiyelwe ukuze kuthuthukiswe ukuhlomula nokubhekelelwa kahle kwababambiqhaza (value creation), ukusebenza ngokusobala kanye nokuphendula. Leli yithuluzi elenzelwe ukuqinisekisa ukuthi ababambiqhaza bayayiqonda imibiko edidiyelwe (integrated reports) futhi libalekelele ukuthi bathathe izinqumo eziphusile emva kokuhlonyiswa ngalo lonke ulwazi olungaba wusizo kubona. Njengamanje, imibiko edidiyelwe iyahluleka ukuhlinzeka ngolwazi olubonisa ukuqonda okujulile ukusebenza kwezinhlangano kanye namaqhingasu ezigxile kuwona izinhlangano, futhi-ke lokho kwenza kube nzima kubabambiqhaza ukuqonda ulwazi oluqukethwe yimibiko edidiyelwe. Ucwaningo lwahlonza ama-variable afanelekile ahlobene kakhulu nokuhlomula nokubhekelelwa kahle kwababambiqhaza. Ucwaningo lwabandakanya ukuhlaziywa kwedatha eyaqoqwa ezinkampanini ezingama-42 ezihweba ku-Johannesburg Stock Exchange futhi kwakhishwa amaphepha-mibuzo angama-80 anikezwa ababambiqhaza abaqokwa ngaphandle kokulandela indlela ethile ehlelekile (randomly), ukuze bawaphendule. Ucwaningo lwaveza ukuba khona kobudlelwano obunohlonze phakathi kokuhlomula nokubhekelelwa kahle kwababambiqhaza kanye nezicibunjalo zenkampani, okusho, imibiko edidiyelwe, ukuphathwa nokulawulwa kahle kwenkampani kanye nezinyathelo eziphathelene nezimali. Ulwazi olusemqoka olwakhiqizwa wucwaningo: Imiphumela yocwaningo oluphathekayo futhi olusekelwe phezu kwezinto ezibonakalayo (empirical study) ihlinzeka ngolwazi olunohlonze oluzolekelela ekuqondeni inqubo yokuhlonyuliswa nokubhekelelwa kahle kwababambiqhaza. Ucwaningo lwabonisa ukubaluleka kokweseka kanye nokuthasisela phezu kwemibiko edidiyelwe enqubweni yokuhlonyuliswa nokubhekelelwa kahle kwababambiqhaza. Ithuluzi lababambiqhaza laqinisekiswa futhi njengethuluzi elicacile eliwusizo olukhulu ekuhlonzweni kobudlelwano obuphathelene nokuhlonyuliswa nokubhekelelwa kahle kwababambiqhaza. Futhi ngaphezu kwalokho ucwaningo lwahlonza izicibunjalo ezibonwa ngababambiqhaza njengezibalulekile futhi ezilekelelayo ekuthathweni kwezinqumo ngobunyoninco kanye nasekuhlonyulisweni nokubhekelelwa kwababambiqhaza ngendlela efanele. / Die belanghebberinstrument is 'n konseptuele raamwerk wat ontwikkel is om geïntegreerde verslae vir waardeskepping, deursigtigheid en aanspreeklikheid te komplementeer. Dit is 'n instrument wat spesifiek ontwikkel is sodat belanghebbers die geïntegreerde verslae kan verstaan en om hulle te help om ingeligte besluite te maak. Tans bied geïntegreerde verslae nie betekenisvolle insig in organisasies se prestasie en hulle strategiefokus nie wat dit dus moeilik maak vir belanghebbers om die inhoud van geïntegreerde verslae te verstaan. Die navorsing identifiseer toepaslike veranderlikes wat sinoniem is met waardeskepping. Die studie het ontleding behels van die data van 42 maatskappye wat op die Johannesburg Aandelebeurs sake doen en die administrasie van 80 vraelyste aan respondente wat ewekansig geselekteer is. Beduidende en positiewe korrelasies tussen waardeskepping en die attribute, naamlik geïntegreerde verslae, korporatiewe beheer en finansiële maatstawwe, is geskep. Bydraes: Die resultate van die empiriese studie verskaf beduidende persepsies van die proses van belanghebberwaardeskepping. Die studie het die belang van die geïntegreerde verslae om belanghebberwaarde te skep, daargestel. Die egtheid van die belanghebberinstrument is ook as 'n kennelike antesedent van waardeskepping bewys. Die studie het ook die attribute geïdentifiseer wat vir belanghebbers saak maak en wat help met effektiewe besluitneming en waardeskepping. / Graduate School of Business Leadership / D.B.L.