The association among the seven elements of the black economic empowerment score and market performance

Abstract

The black economic empowerment (BEE) score consists of seven elements, namely ownership, management control, employment equity, skills development, preferential procurement, enterprise development and socio-economic development. The purpose of this study is to establish whether an association exists between an entity's BEE elements and its share returns in the short term.Based on prior literature, it appears that the market reacts positively to an announcement of a BEE deal, although the literature also indicates that an entity's BEE score, which includes all seven elements of the BEE score, bears a negative relationship to its share returns. Therefore the association between the various BEE elements and share returns needs to be investigated. The study uses a multivariate regression analysis that controls for factors influencing share returns. The study includes the BEE element data as obtained from the survey of the top empowerment companies carried out by Empowerdex/Financial Mail for the period 2005 to 2011.The results of this study indicate that a significant positive association exists between the management control element of the BEE score and the entity's share returns. Furthermore, a significant negative association exists between the ownership and preferential procurement elements of an entity and its share returns. This study contributes to the literature on BEE in the accounting and finance field in South Africa as well as enhances the understanding and effect of BEE compliance through implementation of the generic scorecard as required by the 2007 codes of good practice. The results of this study would be of interest to government policy analysts, investors and managers.

Influence of the performance of black economic empowerment shares on the Johannesburg stock exchange top 40

“…This relationship was significant for both components. Van der Merwe and Ferreira (2014) found that there was a significant and positive relationship between the management control component and the share return.…”

“…Van der Merwe and Ferreira (2014) investigated the relationship between a firm's BEE components and short-term share returns. The study covered the period 2005 to 2011 and the sample comprised top empowerment firms listed by Empowerdex/Financial Mail.…”

Reflecting on compliance with Broad-Based Black Economic Empowerment codes of good practice: Trends and suggestions

“…As a result, directors could have been deterred to engage in share transfer transactions and rather focussed on elements that did not have such a substantial impact on shareholder value. Van der Merwe and Ferreira (2014) found that an increase in B-BBEE element scores was negatively associated with changes in share prices.…”

“…Previous authors focussed on the beneficiaries of B-BBEE (Hoffman, 2008;Patel & Graham, 2012). Others explored the relationship between B-BBEE scores and share market performance (Chipeta & Vokwana, 2011;De Villiers & Ferreira, 2011;Jackson, Allesandri, & Black, 2005;Mehta & Ward, 2017;Strydom, Christison, & Matias, 2009;Van der Merwe & Ferreira, 2014;Ward & Muller, 2010;Wolmarans & Sartorius, 2009) and other financial performance measures (Acemoglu et al, 2007;Kleynhans & Kruger, 2014;Mathura, 2009;Morris, 2018). As far as it could be established, no authors empirically investigated trends in B-BBEE compliance by accounting for changes in the total B-BBEE and element scores.…”

Broad-Based Black Economic Empowerment and corporate financial health

“…Apart from the social justice and legitimacy perspectives, South African and foreign companies are increasingly questioning whether there is a clear financial motivation to comply and improve compliance with the 2003 Act (De Wet 2016; Kleynhans & Kruger 2014). Contradictory results have been reported on the relationship between B-BBEE and financial performance in previous studies (Acemoglu et al 2007;Kleynhans & Kruger 2014;Mathura 2009;Morris 2018;Van der Merwe & Ferreira 2014). It should, however, be noted that these authors utilised relatively small samples, mainly employed accounting-based and market-based performance measures and, with the exception of Morris (2018) and Van der Merwe and Ferreira (2014), focused on total B-BBEE scores without accounting for the individual elements of the scorecard.…”