Page 17 - University of Pretoria RESEARCH REVIEW 2016

SOUTH AFRICAN MARKETS
AND INVESTOR ACTIONS
Efficient markets have several benefits that include protecting investors from bad decisions, and reducing the cost of capital. Researchers at GIBS have examined
these aspects of market decisions.
Professor Mike Ward holds the Chair of Finance at the Gordon Institute for Business Science (GIBS). His research interests are in investment and corporate finance. Working in collaboration with Chris Muller, an independent fund manager and an active participant in financial markets, ensures that their research ‘is grounded in practical reality’.
In work published with Nishal Moodley in the Journal for Studies of Economics and Econometrics, they analyse the trading habits of directors of Johannesburg Stock Exchange (JSE) listed companies. The central question that framed their research was whether it is a good idea for investors to follow the actions of directors who buy or sell their own shares. In terms of the Insider Trading Act of 1999 and JSE regulations, directors are required to report all share trading in companies of which they are principals. Directors who buy or sell shares provide an indirect signal to the market of positive or negative insider information, and the assumption is that investors are likely to trade on signals, even though they have no direct knowledge of the rationale underlying director trades.
The researchers examined 13 840 director trades from 2002–2013, using a portfolio time series approach, and found statistically and economically significant returns for investors who mimic director trades. In particular, they found evidence that directors know when to buy their own shares,
but may be selling for a variety of other reasons,
such as monetising or portfolio rebalancing, and not necessarily on the basis of negative insider information. They conclude that directors’ selling of shares provides a weaker signal of the future performance of the company than is the case with directors’ buying of shares.
Further research published with Taryn Moodley
in the SA Journal of Accounting Research, focused
on the working capital strategy of companies, in particular the relationship between the management of payables and the return to investors. The analysis was based on an extensive database of JSE-listed South African companies over the period 1986– 2014. The results show that for those companies
in industries that have a significant investment
in payables, there is a strong positive association between changes in payable days and shareholder return, which supports the general theory of working capital management.
Ward and Muller have also examined the usefulness of the Capital Asset Pricing Model (CAPM) to estimate the returns investors expect, based on the perceived riskiness of the share. They note that this is a controversial issue in finance, as the CAPM is widely used as an investment tool, but doesn’t really work in practice. They are also working on a paper showing that investors in mutual funds (unit trusts) shift their money to those funds that performed best in the previous quarter. Their analysis illustrates that unless mutual funds are top performers, investors could see their asset base erode quickly. And finally, through the work of a PhD student they are investigating
the interesting problem of why companies that
invest more in growing their assets underperform, a problem that contradicts the theory that investing is a value-creating activity – or should be!
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