Cash Flow as a Predictor of Share Returns: Evidence from the Johannesburg Stock Exchange

The existence of so-called equity market anomalies suggests that factors outside of the traditional asset-pricing models can model share returns. Despite this, there is limited empirical evidence on cash flow metrics as anomalies, and less so on cash flows as a predictor of share returns. The aim of this study is to provide a new insight into the South African equity market by investigating and comparing the extent of return predictability displayed by cash and accrual measures. This research extends the work of Foerster, Tsagarelis and Wang (2017) and investigates previously untested cash-based measures on an untested sample of shares in an emerging market. Fixed effects panel regression models are applied to a dataset consisting of 85 shares listed on the Johannesburg Stock Exchange over the period 2008 to 2018, using cash and accounting variables to test for predictive ability on six-month ahead total share returns. In contrast to the findings by Foerster, Tsagarelis and Wang (2017), the results suggest that accrual-based measures provide more explanatory power for share return variation than cash flow measures. However, using these variables for purposes of earning consistent excess returns requires further investigation. In addition, the strongest regression model consists of both bottom-line earnings and cash flow variables, suggesting that there is predictive power in a combination of traditional profitability and cash flow figures. The value of using such cash flow information in the fundamental investment process has practical implications on asset pricing, the presence of anomalies in financial markets as well as return prediction. Underlying this research is also an inherent test of the level of market efficiency on the JSE. The resulting significance levels suggest that some variation in future returns can be explained by prior movements in company financial figures, which contributes to the understanding of how South African equity markets process and reflect financial data. The study therefore provides evidence to reject a strong-form level of market efficiency and support the argument for a semi-strong form level of market efficiency on the JSE.

Grantor

Department of Finance and Tax

Year dc:date.issued

2019

Author dc:creator

• Alexandroi, Sergei

Advisor dc:contributor.advisor

• Toerien, Francois

• Finance

Handle dc:identifier.uri

http://hdl.handle.net/11427/31430

OAI identifier oai:identifier

oai:open.uct.ac.za:11427/31430