Browsing by Author "de Jager, Phillip"
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- ItemOpen AccessHow IFRS 9 has impacted Deferred Tax Assets and Bank Regulatory Capital in South Africa(2023) Abuka, Kevin; de Jager, PhillipGallemore (2012) empirically proved that banks with larger percentages of deferred tax assets in their regulatory capital are more likely to fail and have higher credit risk. However, following the application of IFRS 9 from January 2018, there arose an increasing likelihood that deferred tax assets included in bank regulatory capital would increase. This was due to the expected credit loss model utilised by IFRS 9 while provisioning for loan losses. The model means that credit impairments are larger and recognised earlier. As a result, deferred tax assets likely increase. This study sought to ascertain whether 1) the nature of the relationship between credit impairments due to loans and deferred tax assets has changed to a stronger positive corelation in the post IFRS 9 era and 2) deferred tax assets are displacing better forms of capital within banks' regulatory capital. The results of the study show that deferred tax assets are increasing in line with credit impairments due to loans in the post IFRS 9 era. Additionally, deferred tax assets arising due to temporary differences make up a larger component of regulatory capital in the post IFRS 9 era. Findings from the study can contribute to the reinforcement and revision of prudential policy set by regulators within the banking sector to ensure that banks maintain sufficient capital adequacy levels.
- ItemOpen AccessThe impact of the change from Basel II to Basel III on the profitability of the South African banking sector(2017) Sadien, Ebrahim; de Jager, PhillipThe objective of this study is to analyse the impact of the change from Basel II to Basel III on the profitability of the South African banking sector. South African banks are regulated in accordance with the Basel Accords and, as such, this study reviews the literature on bank regulation and specifically the evolution of the Basel Accords. The 2008 global financial crisis exposed certain flaws in the global regulatory framework and paved the way for the introduction of Basel III, of which South Africa commenced implementation on 1 January 2013. As mentioned, the review of banking regulation literature will specifically focus on the changes from Basel II to Basel III, with a further focus on two of the key changes introduced by Basel III: the capital requirement amendments and the new liquidity ratios. The study examines the top five banks in South Africa, as these make up 91.1% of the industry's banking assets (as of December 2012). The top five banks are used to create a representative bank of the South African banking sector and an accounting model is performed using a DuPont analysis in order to measure profitability. With respect to the Basel III capital changes, the results show that a 2% increase in capital by increasing the equity-to-asset ratio and all else held equal will result in a decrease of 0.29% in return on equity (ROE) for the South African banking sector. With respect to the Basel III liquidity measures, a 25 basis decrease in maturity transformation, all else held equal, will translate into a 3.38% decrease in ROE. The study contributes to the recent literature on Basel III and profitability. The results will also benefit the South African banking industry and regulators when assessing the profitability impact of the new Basel regulations.
- ItemOpen AccessInvestigating the relationship between corporate tax avoidance and corporate culture in large South African companies(2022) Van Der Spuy, Pieter van Aardt; de Jager, PhillipNot all companies are equally aggressive in their pursuit of corporate tax avoidance, which explains intensive research on the determinants of tax avoidance. Many determinants have been investigated, but the process of tax avoidance, and the relationships between corporate tax avoidance, longtermism (indicative of a stakeholder-orientated corporate culture), and CEO characteristics (informed by upper-echelon theory), are not yet fully understood. Much of previous research is conceptualised from theories such as principal-agent theory. This study investigates the influence of stakeholder orientation, using corporate culture, on corporate tax avoidance, in response to calls for more research using stakeholder theory. A mixed-method approach is used. The quantitative stream uses regressions to investigate the relationship between corporate tax avoidance, corporate culture, and tax-knowledgeable CEOs, based on a sample of 112 large, listed South African companies, studied over a period of 15 years. The South African setting allows the operationalisation of a tax-knowledgeable CEO, based the homogenous nature of CEOs' qualifications in South Africa, where many are chartered accountants. The results suggest that long-term oriented companies pay more tax on average. The results further suggest that tax knowledgeable CEOs are associated with more tax avoidance. The qualitative stream conducts eleven interviews with corporate tax advisors, showing the influence of corporate culture and CEO characteristics on corporate tax avoidance processes, but also how corporate culture and CEO-characteristics mutually inform each other. Altogether, the evidence indicates that the effect of corporate culture is less static than expected, and that the influence of corporate culture on tax avoidance can transcend the influence of CEO-characteristics, as an upperechelon effect. The interviews suggest mechanisms used by CEOs to influence tax culture, such as the creation of a company-wide awareness of the strategic importance of low effective tax rates. These results also indicate the ethical dilemma faced by executives of large companies when considering the use of tax-deductible corporate social responsibility initiatives, not to benefit shareholders or agents, but rather to benefit society as a corporate stakeholder, when governments would not.
- ItemOpen AccessInvestigating the relationship between ESG factors and firm performance in socially challenged jurisdictions relative to developed jurisdictions(2023) Mofokeng, Lebohang; de Jager, PhillipThis research work investigates the influence of the social factor of ESG on firm performance for firms in jurisdictions with socio-economic challenges versus firms in developed jurisdictions. For this research work, South Africa was used as a proxy for a jurisdiction with socio-economic challenges and Australia was used as a proxy for a developed market. Given socio-economic differences, the expectation was that the social factor is more important for South African firms than Australian firms. The corresponding financial and ESG data was collected from 2010 to 2019. The research work is quantitative, with regression models used to undertake the comparative study. The key dependent variables used for this research are share price performance and return on equity, and the primary independent variable of interest is the social factor of ESG. Fundamental and ESG data used for this research came from Refinitive with supplements from Bloomberg and firms' annual financial statements. The study found that the social factor has a directionally negative relationship with share price performance for South African firms. However, the relationship between the social factor and ROE was found to be positive for South African firms. Secondly, the study found that, by comparing South African firms and Australian firms, the social factor has a directionally more positive relationship with return on equity for South African firms compared with their Australian counterparts. A directionally similar result was obtained for share price performance: South African firms exhibited a less negative effect on share price performance than Australian firms. For South African firms, the study also found that the social factor has a directionally more positive relationship with return on equity than the governance factor. However, the environmental factor exhibited a more positive relationship with return on equity than the social factor. It is recommended that further research is conducted using ESG data from other service providers, given the high level of ESG scoring disagreements amongst data providers, as observed by academic research. As ESG gets more prevalent, an interesting study would be to run a similar analysis using unlisted businesses to capture the entire SA business ecosystem. This research study will contribute toward ESG research on South African firms. The study may also have indirect political and social implications in that if there is a prevalent relevance of the social factor, more firms may be incentivised to invest more in host communities' social development and welfare. The study also adds to the relevance and importance of social factor consideration when constructing investor portfolios.
- ItemOpen AccessIs corporate social responsibility a determinant of the capital structure of global systemically important banks?(2020) Ndebele, Nomphumelelo Cindy; de Jager, PhillipIn the wake of the recent global financial crisis, the banking industry has come under heavy criticism for the negative externalities imposed on the economy and society. The distress of the financial system during the financial crisis has triggered public discussions about the role of bank capital structures in the stability of banking institutions. While it was previously thought that regulatory capital requirements are the sole determinant of bank capital structure, recent empirical studies suggest that, instead, the standard cross-sectional determinants that explain the capital structures of non-financial firms also apply to banks. The findings from these studies prompt further investigation into what other factors determine the capital structure of banks. More recently, engagement in Corporate Social Responsibility (CSR) activities has emerged as a vital dimension through which firms develop sustainable strategies that affect overall firm performance. In addition, the subsequent reporting of CSR performance has become increasingly important as more investors incorporate information about the social behaviour of firms in their investment decisions. This suggests that CSR has implications for the financing policies of firms. In light of the development of CSR as a relevant concept in the current corporate environment and especially in the banking industry, the goal of this study is to investigate whether CSR is a determinant of the capital structure of banks through a multiple regression analysis of panel data from 2009 to 2018 for a sample of 28 Global Systemically Important Banks. Using DataStream Refinitv ESG scores to proxy for CSR, the first hypothesis proposes that socially responsible banks tend to be less leveraged than those that are socially irresponsible due to the positive influence on equity financing from the lower costs of capital, informational asymmetries and risk associated with good CSR performance. The second hypothesis examines the effect of bank size on the proposed relationship. Initial results indicate no significant relation between aggregate CSR and bank leverage, however, further analysis shows a significant negative relationship between the governance dimension of CSR and bank capital structure, suggesting that the governance structures of banks are more relevant for bank capital structure decisions. Bank size is found to have no effect on the relationship. The findings from this study have important implications that are particularly relevant in today's financial environment as calls for the restoration of public trust in banking institutions accelerate.
- ItemOpen AccessResearch on post commencement finance data from South African companies in business rescue(2018) Gordon, Justin; de Jager, PhillipSA has one of the lowest survival rates of small and medium enterprises (hereafter referred to as “SMEs”), in the world (Edmore, December 2011). Therefore, business rescue is critical in developing SA’s economy, as defined in Section 7(b)(i) of the Companies Act, No.71 of 2008 (“the Act”) which reads: “Promote the development of the South African Economy by encouraging entrepreneurship and enterprise efficieny” The literature on business rescue concludes that post commencement finance is critical to the success of business rescue. However, to date, there has been no research performed on actual data collected from practitioners to answer the question of whether post commencement finance is a predictor of a successful business rescue The findings of this study initially contradict the literature insofar as 56% of business rescues received post commencement finance: however, further investigation showed that only 7% of the total companies in this study received third party financial institutional post commencement finance, with the balance being introduced by shareholders. The main finding of this study was that the introduction of post commencement finance is only a partial predictor of a successful business rescue. Thus, in the case of those companies which received finance, under business rescue, only 57% were successful. Another finding of this study is that the combination that provides the best probability of successful business rescue is when equity, in the business rescue company, is made available after the successful adoption of the business rescue plan.
- ItemOpen AccessSupervisory Risk Assessment in a Basel Environment:The Stress Testing of Banks in Botswana(2018) Mathame, Thobo; de Jager, PhillipThe study uses stress testing to determine the need, if any, for additional capital and/or provisioning for commercial banks in Botswana. The aim is to probe the use of supervisory stress testing as a mitigating factor to some concerns that have been raised with the Basel capital adequacy ratio (CAR) following the 2007-9 global financial crisis. During the crisis, some financial institutions failed or required some form of government assistance, amid having met the minimum CAR requirements prior to the crisis. This led to increased public scrutiny and a loss of confidence in financial regulation. As a result, some scholars have argued that the Basel capital framework is not sufficient as a measure of capital adequacy and as such advocate for the adoption of stress testing to overcome the shortcomings. Specific reference is often made to the success of the subsequent SCAP (US) and CEBS (EU) stress tests that are conceived to have helped restore public confidence as they revealed several oversight loopholes in the existing Basel methodology for the determination of adequate capital for financial institutions. In this regard, this paper considers the context of Botswana, where, even though banks withstood the financial crisis with a relatively strong stance, the economy remains concentrated with heavy dependence on the mining sector. This increases macroeconomic vulnerability and banking sector risks and hence intensifies the need to ensure that banks have sufficient capital holdings at all times. The study adopts an accounting-based approach to stress testing by applying shocks for credit, interest rate, foreign exchange and liquidity risks with the CAR as the main metric. A combined scenario stress test revealed that a collective change in provisions, NPLs, interest rate and exchange rate, that resulted in a decline in CAR from 19.4 to 18.6 post-shock. The available capital remains adequate even following assumed stress conditions. However, the stress test has revealed weaknesses in credit risk and foreign exchange risk as some banks’ capital adequacy fell below the 15 percent minimum. Furthermore, the scenario analysis showed the need for a P22 million capital injection into the banking system, should the tested scenarios occur. As far as can be reasonably established, this kind of study has not been published before for Botswana. As such, this paper lays groundwork for future studies particularly relating to the formulation of scenarios that can better reflect the risk profile of the Botswana banking system.
- ItemOpen AccessThe application of IAS 39 reclassifications by global systemically important banks (G-SIBs) since 2008/2009(2020) Modimakwane, Winnie Tebogo; de Jager, PhillipThe International Accounting Standard Board (IASB) introduced an amendment to the International Accounting Standard 39 – Financial Instruments: Recognition and Measurement (IAS 39) and to International Financial Reporting Standard 7 – Financial Instruments: Disclosures (IFRS 7) on 13 October 2008. These amendments allowed entities to reclassify non-derivative financial assets from the fair value option to historical cost. The purpose of this study is to explore how Global Systemically Important Banks (G-SIBs) applied the amendment to IAS 39 since 2008/2009. The study is guided by four main objectives in which the first two objectives explores how the G-SIBs applied the reclassifications during the allowed period, 2008/2009 and the period beyond 2009 when the application of the standard should have been stopped. The study further investigates if any G-SIBs used restatements to circumvent the requirements of the IAS 39 that does not allow reclassifications into and out of the ‘designated as at fair value' category. Finally, the study explores the impacts of the reclassifications on the G-SIBs' ROE and total regulatory capital with the aim to determine if G-SIBs reaped any long-term benefits from the reclassifications and whether any traces of earning and capital management exist in the way G-SIBs applied the amendment to IAS 39. To achieve these objectives a comparative case study approach, which is qualitative in nature/scope was used with 10 G-SIBS forming part of the units of the analysis of the study. The study finds that: (i) 70 percent of G-SIBs reclassified assets during 2008/2009; (ii) a significant improvement on the reported net income was observed with a slight improvement on the return on equity and regulatory capital during 2008/2009, while the long-term impacts on ROE and total capital are insignificant; and (iii) G-SIBs did not restate comparative figures to evade the prohibition on reclassifications into and out of the ‘designated as at fair value' category. As far as can be reasonably established, this kind of study has not been published before for G-SIBs. As such, the study contributes by including the analysis of G-SIBs and the long-term implications of applying the amendment to IAS 39 to the current literature, as well as adding another possible type of a restatement to the financial restatements' literature. All these aspects are currently lacking in the existing literature.
- ItemOpen AccessThe Relationship Between ESG Scores and Cost of Debt – Evidence from the S&P 500(2022) Burger, Stefan; de Jager, PhillipThe purpose of this study was to determine the relationship between environmental, social, and governance (ESG) disclosure scores and a firm's cost of debt. Previous studies relating to ESG and cost of debt produced mixed results, with most finding that a relationship exists. Most of the research found superior ESG to decrease a company's credit risk and therefore borrowing rates. This was the relationship that this study expected. The study focused on all the companies on the Standard and Poor's 500 (S&P 500) that had both an ESG disclosure score and a cost of debt figure. The study collected panel data over a five-year period from 2016 to 2020. Fifty-six panel data regressions, including robustness checks were used to test the relationship between ESG and its components and cost of debt. The preferred regression model for ESG and its components from 2016 to 2020 was a panel data regression with fixed effects. In contrast to prior research, no material relationship was detected between ESG disclosures scores and the cost of debt of the sample companies for the period under consideration. Therefore, it was inferred that superior ESG does not decrease cost of debt for a company. It was found that liquidity and firm size variables – rather than ESG variables – had an influence on cost of debt. The findings of this study have both professional / real-world implications for investors and debt providers and academic implications for researchers. For professionals, including investors and debt providers, the results showed that ESG is not as advanced in the debt markets as previously perceived, owing to no relationship being found, and that ESG scores are more important to equity holders than to holders of debt. From the academic point of view, the results add to the existing body of knowledge and provide academics and researchers with an additional standpoint on the relationship between ESG and cost of debt.
- ItemOpen AccessThe South African Stock Market Reaction to Mergers and Acquisitions Transaction Attempts(2023) Madume, Ndaedzo; de Jager, PhillipThis study investigates the reaction of the South African stock market to M&A transaction attempts. The aim is to understand, better, how unsuccessful M&A transactions are priced in a less-competitive market. By using a South African M&A dataset for companies listed on the JSE between 1997 and 2020, this study provides empirical evidence that, on average, in South Africa, acquiring firms earn positive abnormal returns for a few days before the transaction is announced for the first time in the market but negative abnormal returns after it is announced that the M&A transaction attempt has been unsuccessful. However, around the first announcement period, the target firms earn positive abnormal returns during a 5-day event window. The study also investigated whether the market punishes both the target and the acquiring firms for engaging in M&A transactions which could not be concluded found that the target firms earn negative abnormal returns at once but in contrast, the negative abnormal returns for the acquiring firm are delayed by five days. An event study methodology was used, and the sample size comprised of 44 JSE listed firms of which 31 were acquiring firms and 13 were target firms. This study is important because it provides insights into M&A using the most recent data. Furthermore, this research helps the parties involved to understand the market reactions to failed M&A transactions and gives insights into the determination of break-fees. Also, short-term investors can determine when their returns are more likely to be optimized if they should decide to trade in M&A events. This is important for M&A practitioners, asset managers, and for both the acquiring and target firms. It is also relevant to other market participants such as pension funds.
- ItemOpen AccessWhy are microcredit interest rates in sub-Saharan Africa so persistently high? Testing the predictions of theoretical models(2018) Chikalipah, Sydney; de Jager, PhillipThe microfinance industry is progressing towards becoming a core of financial inclusion in the sub-Saharan African (SSA) region. Despite the recent growth of microfinance in the SSA, that industry is seemingly characterised by high lending rates. Those high rates have become a hotly debated topic amongst microfinance stakeholders. It is against this background that this study first investigates the factors that influence the persistently high microcredit interest rates in SSA; it does so by utilising a panel dataset assembled from the Microfinance Information eXchange (MIX) market, the Heritage Foundation, and the World Bank, covering the period 2003 to 2011. Secondly, this study examines the determinants of financial inclusion in SSA, using a cross-sectional dataset obtained from Statista and the Global Findex for the year 2014. Several empirical approaches are used in the study: Bayesian Model Averaging, fixed effects, Generalised Method of Moments, and Ordinary Least Squares. The results reveal evidence of the following: (i) the operating costs associated with providing small loans, unexploited economies of scale, and institutional deficiencies all contribute towards increasing the microcredit interest rates; and (ii) volatile macroeconomic fundamentals exert undesirable effects on the microcredit interest rates. Second, a methodical analysis of the relationship between outreach to the poor and the financial performance of microfinance institutions (MFIs), produced the following findings: (i) providing smaller microcredits is associated with lower operating profit, and the exact opposite is true; and (ii) outreach to the poor clients is significantly related to a stronger financial performance. Third, the results of the determinants of financial inclusion demonstrate that illiteracy negatively affects financial inclusion in SSA. Overall, the study's empirical findings suggest that the following approach is needed to promote low microcredit interest rates. First, MFIs must be supported to expand outreach, and adopt digital technology to drive operational efficiency; second, countries in SSA must strengthen the prevailing weak institutional environment in the region; and third, macroeconomic policy regimes must be moderated, particularly by maintaining low and stable inflation rates. In relation to financial inclusion, countries in SSA must be committed to fighting functional illiteracy. All this could contribute to a financial inclusion agenda and towards poverty eradication in the SSA region.