The effect of expensing share-based payments on basic earnings per share of South African listed companies

Pretorius, Denice P.; Villiers, Charl de

doi:10.1108/medar-03-2013-0006

Cited by 7 publications

(12 citation statements)

References 13 publications

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“…Typical full quantum schemes are restricted and conditional shares. Globally and in South Africa, share options were widely employed until 2005, when IFRS 2 was implemented and companies had to start expensing share options (Pretorius & De Villiers 2013). From 2006, share options were slowly replaced by share-appreciation rights and, more recently, by full quantum schemes (Steenkamp & Wesson 2018).…”

Section: Defining Share-based Directors' Remunerationmentioning

confidence: 99%

Share-based remuneration: Per-director disclosure practices of selected listed South African companies

Steenkamp¹,

Dippenaar²,

Fourie³

et al. 2019

Journal of Economic and Financial Sciences

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The Johannesburg Stock Exchange (JSE), the Companies Act of 2008 (the Act) and the third King Report on Corporate Governance (King III) require disclosure on the share-based remuneration of directors of listed South African companies on a per-director basis. Research purpose:The first objective was to determine the disclosure practices of JSE-listed companies relating to share-based remuneration on a per-director basis, to examine whether the disclosure practices comply with regulatory requirements and whether share-based remuneration was disclosed consistently. Comparisons were made between companies in the three largest industries on the JSE (financial, industrial and basic materials industries) as well as between small, medium and large companies. The second objective was to develop a bestpractice disclosure example that complies with the JSE listing requirements, the Act and the latest King Report (King IV).Motivation for the study: Previous research has hinted that share-based remuneration is poorly disclosed in South African annual reports, but it has not specifically been studied.Research approach, design and method: Data on disclosure practices were collected from annual reports. The collected data were analysed against the regulatory requirements to evaluate compliance and compared between companies to evaluate consistency.Main findings: Some companies failed to comply with regulatory requirements (did not disclose the value of share-based remuneration and the number of instruments employed). Large companies were more likely than small companies to comply with regulatory requirements. Between-company inconsistency was noted when comparing the value of sharebased remuneration disclosed by companies in the sample.Practical/managerial implications: Non-compliance with regulatory requirements regarding the disclosure of per-director share-based remuneration was noted in the sample, which could lead to stakeholders having insufficient information for decision-making purposes. Inconsistent disclosure practices, leading to incomparability between similar companies, could hamper effective investment decisions. Contribution/value-add: A best-practice disclosure example was developed to assist companies seeking to comply with disclosure requirements and enhance comparability between JSE-listed companies in future.

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Section: Defining Share-based Directors' Remunerationmentioning

confidence: 99%

Share-based remuneration: Per-director disclosure practices of selected listed South African companies

Steenkamp¹,

Dippenaar²,

Fourie³

et al. 2019

Journal of Economic and Financial Sciences

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“…Additionally, research shows that companies breaking such earnings patterns experience substantially negative abnormal share returns (DeAngelo, DeAngelo & Skinner, 1996;Barth et al, 1999). Managers on share-based remuneration schemes therefore have an incentive to report profits (loss avoidance) and an earnings number greater than or equal to that of the previous year (Pretorius & De Villiers, 2013). Burgstahler and Dichev (1997b) suggest that, in an attempt to meet or beat earnings expectations, thereby avoiding negative market reactions, managers purposefully adjust reported earnings, creating information asymmetries between actual economic performance and reported earnings.…”

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confidence: 99%

Earnings management through loss Avoidance: Does South Africa have a good story to tell?

Pududu

Villiers

2016

S. Afr. j. econ. manag. sci. (Online)

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The purpose of this study is to determine whether South African managers manage earnings to avoid reporting small losses (small earnings decreases). The study covers all the companies listed on the Johannesburg Stock Exchange (JSE) from 2003 to 2011. In line with Burgstahler and Dichev (1997), the cross-sectional distributions of earnings and changes in earnings are examined and the distributions are shown in histograms. Previous research (using data from the United States) has shown that the distribution curve for both the earnings and the change in earnings variable had noticeably fewer observations just below zero than would normally be expected, and a significantly higher number of observations just above zero. This pattern in the distributions suggests that managers manage reported earnings to ensure that earnings do not fall below a specific threshold, this being zero or the previous year's performance. Interestingly, and in contrast with the previous literature, using the Burgstahler and Dichev (1997) research model of analysis, our results show no evidence of managers in South Africa managing earnings to avoid reporting small losses or small decreases in earnings. A possible reason for this could be the relatively smaller size of the JSE (compared with stock exchanges in the United States). In addition, and more important, is the possibility that investors and analysts in South Africa may be fixated on other performance indicators, such as revenue and headline earnings per share, rather than on earnings (profits). This study adds to the limited research on earnings management in South Africa, which is a developing economy. Furthermore, previous research shows an inverse relationship between earnings management and earnings quality. The results of this study may therefore be useful to the users and the regulators of financial reports, both are concerned with earnings for the purposes of assessing the cost of capital and how companies utilise their resources.

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“…Two types of sharebased remuneration exist: those that are equity-settled (eventually settled by the company issuing shares) and those that are cash-settled (where the amount owed is paid out in cash, but determined with reference to the share price) (IASB 2004). Before the effective date of International Financial Reporting Standard (IFRS) 2 on SBPs, equity-settled SBPs were not recognised as an expense in the AFS of the company granting them, while cash-settled SBPs were recorded as an expense (Pretorius & De Villiers 2013). In the 1990s and early 2000s (before the effective date of IFRS 2), equity-settled share options were the most common share-based remuneration being used, probably owing to share options not causing an expense in the AFS (Murphy 2012).…”

Section: Key Focusmentioning

confidence: 99%

“…When considering share-based remuneration specifically, it would seem that the practices of the developed nations are being adapted by emerging economies, and that the two environments, therefore, differ in terms of the characteristics of executive share-based remuneration (Bruce et al 2005 (Pretorius & De Villiers 2013) and can also artificially increase the popularity of share-based remuneration (Avallone et al 2014). The earnings volatility accompanying the expensing of share-based remuneration under IFRS 2 could have led to a decrease in the overall usage of share-based remuneration, an amendment to the type of arrangements being employed or an increase in the use of performance-linked vesting conditions (Fisher & Wise 2006).…”

Section: Theoretical Perspectives On Share-based Remuneration To Executivesmentioning

confidence: 99%

“…A South African study on periods commencing subsequent to the effective date of IFRS 2 found that EPS showed a statistically significant decrease during the post-IFRS 2 period (Pretorius & De Villiers 2013). The average rand-value of the IFRS 2 expense reported in profit-or-loss decreased over the period 2006-2009, although the number of companies reporting an expense for SBPs increased (Pretorius & De Villiers 2013).…”

Section: Theoretical Perspectives On Share-based Remuneration To Executivesmentioning

confidence: 99%

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Changes in South African executive share-based remuneration

Steenkamp

Wesson

2018

Journal of Economic and Financial Sciences

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The purpose was to determine whether the implementation of International Financial Reporting Standard (IFRS) 2 as well as the financial recession affected the characteristics of share-based remuneration paid to South African executives.Motivation for the study: Stakeholders should be aware of whether environmental factors influence business practice relating to share-based remuneration (especially in an emerging economy, such as South Africa, where international evidence might not be applicable).Research design/approach and method: Share-based remuneration details of the chief executive officers of 28 South African listed companies were obtained for the period 2002-2009 (these dates were chosen to include both the effective date of IFRS 2 and the financial recession). Data were analysed (using analysis of variance and generalised estimating equalisation techniques) to determine whether there were statistically significant differences in the sharebased executive remuneration between the period before and after the effective date of IFRS 2, as well as before and during the financial recession.Main findings: Share options usage decreased after the effective date of IFRS 2, and even further during the recession. Share-appreciation rights were increasingly used after the effective date of IFRS 2 and seemed to have replaced share options subsequent to the implementation of IFRS 2. The use of share purchase plans decreased during the recession and was replaced by performance shares. Performance vesting conditions were more prevalent in share-based remuneration schemes in the post-IFRS 2 period. Practical/managerial implications: Shareholders and regulators should take cognisance of the fact that business practice in respect of share-based remuneration is affected by new accounting standards and the economy. Contribution/value-add:This study addressed the knowledge gap in the literature regarding the effect of IFRS 2 and recession on executive share-based remuneration in emerging economies, and specifically in South Africa.

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The effect of expensing share-based payments on basic earnings per share of South African listed companies

Cited by 7 publications

References 13 publications

Share-based remuneration: Per-director disclosure practices of selected listed South African companies

Share-based remuneration: Per-director disclosure practices of selected listed South African companies

Earnings management through loss Avoidance: Does South Africa have a good story to tell?

Changes in South African executive share-based remuneration

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