Browsing by Author "Pitt, Lucian"

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    An assessment and comparison of bankruptcy prediction models in forecasting the financial distress of JSE-listed companies over a twenty-year period (2000 to 2020)
    (2023) Hendricks, Leon; Pitt, Lucian
    This study aimed to test the reliability of various models in predicting the failure of JSE-listed companies. Spanning a period of twenty years between the years 2000 and 2020, a sample of 156 companies was considered, with variables extending across financial information, non- financial information, as well as macroeconomic indicators. The timespan considered for the assessment is particularly significant considering that it encompasses two periods of catastrophic negative market downturns. This includes the 2008 financial crisis and the impacts of the Covid-19 pandemic in 2020. Furthermore, the introduction of new international accounting standards in the latter part of this period, implemented to address issues of risk and transparency in financial reporting, had a marked impact on accounting ratios. Accounting ratios have traditionally been used as inputs in distress prediction models. Considering this context, a study of the comparative performance of various models was undertaken, with the model set including multiple discriminant analysis, logit, probit, recursive partitioning and non-financial models. What was particularly noteworthy in this research was the inclusion of models developed by South African researchers in the model set. In respect of the multiple discriminant analysis, logit and probit models, the results demonstrated a predictive accuracy rate below those surfaced in previous studies, with accuracy rates averaging between 55% and 70%. These models were cumbered predominantly by Type I errors. The application of a model which included both financial and non-financial variables demonstrated more favourable results at an accuracy rate of 73%. The recursive partitioning model, however, which comprehended a high ratio of cashflow- related variables, yielded the highest accuracy, at 83%. The model, with its cash focus and its unique approach of considering the cumulative impact of variables instead of basing the predictive outcomes on the performance of a single financial year, tended not to fall prey to the error-types prevalent in the other models in the model set. The output of this research affirmed the importance of the traditional and rudimentary marker between distressed and non-distressed firms. That is, the abundance of cash or the lack thereof is the key differentiating mark between failure and success. The research also highlighted the importance of considering the cumulative impact of variables when forecasting the failure or success of companies, instead of basing predictive outcomes on the performance of a single period. Furthermore, this research confirmed what had been established in previous studies. That is, the size of the firm is a significant predictor of bankruptcy. This study also attempted to reassess the outcome of distress prediction models, by adjusting for the impact of changes in accounting. The impact on the predictive accuracy of the models by normalising for accounting changes, however, was inconclusive. This was mainly due to the extent of Type I errors across the multiple discriminant analysis, logit and probit models, in conjunction with the low prevalence of failed companies towards the latter part of the period considered in this research when changes in accounting standards were introduced. Further research is required in this area to understand the impact of accounting changes on traditional distress prediction models and potentially to revise these distress models, in order to yield higher predictive accuracies.
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    The relationship between ESG disclosure and corporate financial performance: a comparative study among developed and emerging markets companies
    (2025) Liang, Yanni; Pitt, Lucian
    This study examines the impact of companies' environmental, social and governance (ESG) disclosure on corporate financial performance. It also compares this relationship among developed and emerging markets companies. The study was based on ESG scores from data obtained from Bloomberg. The sample data consisted of information from 2145 developed and 2023 emerging companies from 2015 to 2022. Using a Fixed-Effects panel regression model, the research results indicate that developed market companies represent higher ESG combined and sub-component scores than emerging market companies. This study finds that developed market companies' ESG performance is positively associated with financial performance (ROA) and market valuation (Tobin's Q). Companies in emerging markets showed a positive relationship between ESG scores and market valuation (Tobin's Q). Results also indicated a neutral relationship between ESG initiatives and emerging markets companies' ROA. Thus, the study implies that ESG investment is still in the early stage in emerging markets with room for growth, while developed market ESG performance is leading the way in terms of its impact on company performance. The results indicate that whilst the market recognises the potential benefit of ESG investment, it still has some way to go regarding translation into the company's book performance. This has significant implications for investment decisions. This study fills an existing gap in literature in understanding the relationship between company performance and investment in ESG, especially as it pertains to the difference in this relationship between companies in emerging and developed economies.
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    The relationship between VAICTM, company performance and market value of companies on the Johannesburg Securities Exchange
    (2022) Dullabh, Hitesh; Pitt, Lucian
    Purpose - The purpose of this paper was to examine the impact of Intellectual Capital (IC), using the VAICTM approach, against certain company performance indicators as well as market value on listed companies in South Africa. Design/Methodology/Approach - The study used secondary data of 50 listed companies from the Johannesburg Securities Exchange (JSE) over a period of five years (2016-2020), obtained from the IRESS Expert Database, as a basis for its analysis of the relationship between VAICTM (IC), company performance and market value. IC and its components are calculated using Pulic's (2000) VAICTM approach. Company performance is measured by Return on Assets (ROA) and Asset Turnover (ATO). Market value is measured by the Tobin's Q calculated as market to book ratio (TQ). The two-way Fixed Effects regression model is applied to statistically test the relationship between IC and company performance indicators , as well as the relationship between IC and market value. Findings - The results indicate that VAICTM and capital employed efficiency (CEE), are positively and significantly associated with market value of listed companies in South Africa. The relationship between the remaining components of VAICTM, Human Capital Efficiency (HCE) and Structural Capital Efficiency (SCE), and company performance and market value was not found to be statistically significant. Practical Implications - Within the South African context, physical and financial capital (represented by CEE) plays a dominant role in how market participants value the company, whilst HCE and SCE seem to have less of an influence on the market's perception of value. The recognition value by market participant, albeit confined to just one of the components of VAICTM, may be indicative of the market pre-empting such value in company performance going forward. These findings provide insight into the role that investment in IC can play in supporting company performance and market value of the company. v Originality/Value - This study provides a more recent analysis of the original work performed by Firer & Williams (2003) and Firer & Stainbank (2003). It also provides insight into progression and recognition of IC in the South African Market. Finally, this study contributes to the still limited body of academic literature on the relationship between the company's IC, its performance and its market value. The significance of this contribution is its focus on companies in an emerging market and the focus on South African companies in particular, given the dearth of such studies with this particular focus.
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    The relationship between VAIC™, firm performance and firm value of companies: a cross-country analysis
    (2025) Thomas, Bradley; Pitt, Lucian
    Purpose – The aim of this research was to examine the relationship between intellectual capital (IC), firm performance and firm value in South Africa, Brazil and Indonesia. Design/Methodology/Approach – The study applied the difference generalised method of moments (DGMM) estimator to investigate the relationship between 787 listed firms from the Johannesburg Stock Exchange (JSE), the Brazil Stock Exchange (B3.S.A) and the Indonesia Stock Exchange (BEI), spanning 5 years from 2019–2023 making use of the VAIC™ approach and its components to test the relationship with firm performance and firm value. The study used secondary data from Eikon Refinitiv. Findings – The study found that firms in all three countries leverage both intangible and physical capital at a composite level (VAIC™) to enhance performance. However, from a valuation perspective, the market only reward firms in Brazil at an aggregate level. The individual VAIC™ components show mixed results across the countries. Brazilian and Indonesian enterprises appear to utilise their human and physical capital more efficiently to generate shareholder returns and create value compared to South African companies. In contrast, South African firms tend to invest in innovation—such as patents, trademarks, systems, and processes—to achieve positive returns, even though this may the stifle shareholder wealth creation. Practical Implications – In general, physical capital dominates the findings. It suggests that the market continues to reward firms for using this source of capital to generate shareholder wealth. The findings imply SCE and HCE offer limited value on their own and that it benefits firms to use both intangible and tangible assets. Originality/Value – The study builds on the research of Nadeem et al. (2017) and Nadeem et al. (2019) by providing an updated analysis utilising the DGMM. There is a dearth of studies that have adopted the DGMM to investigate the relationship of IC with firm performance and firm value on a cross-country basis on South Africa, Indonesia and Brazil. Given the limited research using this particular method of the GMM, we are contributing to filling this void.