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The Signalling Effect of Dividends on Future Financial Performance: a Case of South African Listed Companies in the Post-Apartheid Era

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The Signalling Effect of Dividends on Future Financial Performance: a Case of South African Listed Companies in the Post-Apartheid Era THE SIGNALLING EFFECT OF DIVIDENDS ON FUTURE FINANCIAL PERFORMANCE: A CASE OF SOUTH AFRICAN LISTED COMPANIES IN THE POST-APARTHEID ERA by FAUSTINA MASOCHA submitted in accordance with the requirements for the degree of MASTER OF PHILOSOPHY INACCOUNTING SCIENCES at the UNIVERSITY OF SOUTH AFRICA SUPERVISOR: S. NDLOVU NOVEMBER 2017 DECLARATION STUDENT NUMBER: 50885073 I FAUSTINA MASOCHA, declare that the research entitled: “The signalling effect of dividends on future financial performance: A case of South African listed companies in the post-apartheid era.” is my own work and that all the sources that I have used or quoted have been indicated and acknowledged by means of complete references. I further declare that i have not previously submitted this work or part of it, for examination at UNISA for another qualification or at any other higher education institution. NOVEMBER 2017 SIGNATURE: F. MASOCHA DATE ii ACKNOWLEDGEMENTS Foremost, I would like to express my sincere gratitude to my supervisor, Mr Stephen Ndlovu. As my mentor, he has taught me more than I could ever give him credit for here. I am especially grateful for his guidance and for allowing me to express my ideas freely. Nobody has been more important to me throughout this journey than my family. I am forever grateful for the sacrifices they made for me to finish my study. I would like to thank my loving and supporting husband, Blessing Nyabunze for his unwavering support and understanding. Most importantly, I wish to thank my wonderful son, Munashe, for his patience and understanding through the entire process. This work would not have been possible without the financial support of the UNISA Student Funding. I am especially indebted to them since they helped me meet my study costs for two consecutive years. I would also like to thank my fellow research mates, Mkhululi Sibindi, Perpetual Enock, and Edmore Taranhike for the stimulating discussions. I learned a lot from all of you. Finally yet importantly, I am so grateful to the Almighty God for giving me the opportunity to pursue this study. iii DEDICATION I dedicate this to the following people: My husband, Blessing Nyabunze, for being there through it all. Without your support, I would not have had the time to finish this dissertation. My son, Munashe Nyabunze for sacrificing your time with me so that I could study. Let this study be a motivation to you that everything is possible if you put your heart and mind into it. My late mother, Chipo Mabeta, for believing in me before I even knew how to believe in myself. iv ABSTRACT Many theorists have linked dividends with the ability to carry signals regarding a firm’s expected financial performance. Despite being grounded on a sound theoretical framework, empirical evidence has failed to unanimously corroborate the dividend signalling hypothesis, with some authors resignedly concluding that dividends are the puzzle of finance literature. Recent empirical evidence has shown that limiting the dividend signalling hypothesis to earnings has contributed to that puzzle. To try and decipher the puzzle, this study extends the dividend signalling hypothesis to measures of financial performance seldom linked with dividend signalling such as liquidity and gearing. Using panel data regression models and data for 39 firms listed on the JSE from 1995 to 2016, the study reveal that when one controls for the mean reversion and autocorrelation of profitability, dividends lose the power to signal earnings. The results further show that managers in South Africa use dividends to signal expected changes in liquidity and gearing. Key words: dividend signalling, dividend policy, dividend puzzle, financial performance, profitability, liquidity, gearing, mean reversion, panel models. v TABLE OF CONTENTS DECLARATION .................................................................................................................. ii ACKNOWLEDGEMENTS .................................................................................................. iii DEDICATION ..................................................................................................................... iv ABSTRACT ......................................................................................................................... v TABLE OF CONTENTS ..................................................................................................... vi LIST OF TABLES .............................................................................................................. xi CHAPTER 1 ........................................................................................................................ 1 1 ORIENTANTION .......................................................................................................... 1 1.1 INTRODUCTION ................................................................................................................................. 1 1.2 BACKGROUND INFORMATION .......................................................................................................... 4 1.2.1 Performance ............................................................................................................................. 5 1.2.2 Financial Performance .............................................................................................................. 5 1.2.3 South Africa and the dividend puzzle in the apartheid era ...................................................... 5 1.2.4 South Africa and the dividend puzzle in the post-apartheid era .............................................. 7 1.3 PROBLEM STATEMENT...................................................................................................................... 8 1.4 RESEARCH OBJECTIVES ................................................................................................................... 10 1.5 RESEARCH HYPOTHESES ................................................................................................................. 11 1.6 RESEARCH METHODOLOGY ............................................................................................................ 12 1.7 DEFINITION OF TERMS .................................................................................................................... 14 1.8 ETHICAL CONSIDERATIONS ............................................................................................................. 17 1.9 CHAPTER OVERVIEW ....................................................................................................................... 18 1.10 CHAPTER CONCLUSION ................................................................................................................... 19 CHAPTER 2 ...................................................................................................................... 21 2 THEORETICAL FRAMEWORK ................................................................................. 21 vi 2.1 INTRODUCTION ............................................................................................................................... 21 2.2 DIVIDEND FUNDAMENTALS ............................................................................................................ 21 2.3 DIVIDEND DETERMINANTS ............................................................................................................. 22 2.4 DIVIDEND POLICY ............................................................................................................................ 25 2.5 TYPES OF DIVIDENDS ...................................................................................................................... 27 2.6 TAXATION OF DIVIDENDS IN SOUTH AFRICA .................................................................................. 28 2.7 DIVIDEND THEORIES ....................................................................................................................... 32 2.7.1 Dividend Irrelevance theories ................................................................................................. 33 2.7.2 Dividend relevance theories ................................................................................................... 35 2.8 DIVIDEND SIGNALLING THEORIES ................................................................................................... 36 2.8.1 Classical signalling theories ..................................................................................................... 37 2.8.2 Modern signalling theories ..................................................................................................... 39 2.9 FINANCIAL PERFORMANCE ............................................................................................................. 41 2.10 DIVIDEND SIGNALLING AND FINANCIAL PERFORMANCE ............................................................... 44 2.11 CHAPTER CONCLUSION ................................................................................................................... 45 CHAPTER 3 ...................................................................................................................... 46 3 LITERATURE REVIEW .............................................................................................. 46 3.1. INTRODUCTION ............................................................................................................................... 46 3.1 SIGNALLING OF EARNINGS ............................................................................................................
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