Indicators of firm growth: Evidence from the JSE

Abstract

The estimation of firm growth is increasingly relevant to providers of capital in periods of economic uncertainty. The current study employs univariate and multivariate analyses to assess the impact of real GDP and the dividend payout ratio on earnings growth of JSE-listed firms. The findings reveal that there is no relationship between these hypothesised predictors of earnings growth, despite contrasting results of previous studies. Through the inclusion of real GDP in models that are established in the research, the study contributes to the literature of macroeconomic variables as lead indicators of firms’ earnings growth potential. This research also extends prior research on the impact of dividend payout ratio on future earnings growth.

Keywords:

• earnings growth
• growth indicator
• dividend payout ratio
• real GDP
• multivariate panel regression
• sustainable growth model

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 This can be traced to work conducted by Ross (1973) and Mitnick (1975). The former focused on economic agency and Mitnick on institutional agency. The results of Arnott and Asness (2003) illustrate agency problems.

2 This was done to ensure delisted firms are also considered.

3 Real GDP and inflation growth were not adjusted to the company’s financial year.

4 IRESS is an Australian software company which focuses on the financial markets.

5 This was primarily attributed to the more prominent mismatching problems faced by cash flow measures as opposed to accrual measures.

6 This reduction in earnings variability suggests that the South African economy is more developed or competitive than it was at the time of prior research. The differences will also be the result of a longer time period under review.

7 To summarise, similar to the base model tests and the lagged model tests, the efficiency of the model in predicting the attributable earnings growth remains relatively strong in the short-term, indicative of the temporary ability of the model to explain variation in earnings growth.

8 When testing the free cash flow theory, the ratio of the market value of equity and the book value of debt divided by the book value of total assets was used as per Fama and French (2002). This is very similar to Tobin’s q.