The explanatory value of intrinsic equity valuation models for share price variations: A survey of recent approaches

Over the past six decades, a considerable amount of research has been conducted to better understand the explanatory ability of intrinsic equity valuation models to account for variations in equity share prices or returns, in which the accounting-based Ohlson residual income valuation framework has been the primary focus. Meanwhile, several variants of this model have emerged, the foremost of which typically comprises the decomposition of the Ohlson residual income variable into substitute accounting earnings variables, such as the traditional bottom-line earnings variable or, more recently, alternative earnings performance measures, of which earnings before interest, tax, depreciation and amortisation (EBITDA) is a particular case in point. However, there appears to be a lack of consensus about the variables of interest and the most appropriate model to define the predicted interconnections between accounting values and share prices or share price returns. In light of this lack of accord, the aim of this study was to examine the recent literature with regard to the approaches and evidence pertaining to the Ohlson model and the recent variants thereof that are based either on traditional or alternative earnings performance measures, with a view to answering the following research questions: 1. Which econometric model results in the best explanation of the association between accounting information and share prices? 2. Consequently, which variable, when combined with equity book values, seems to provide the most persuasive evidence of association with equity share prices: EBITDA, earnings or residual income? To answer these questions, a systematic literature review was conducted. The criteria were that the studies had to have at least two explanatory variables of interest in accounting for share price variations or returns, with one of them being equity book values and the other being any earnings performance measure, such as residual income, earnings, EBITDA, or combinations involving transformations of these. The review entailed a critical evaluation of the methodologies, model specification and model output against the reported findings, inferences and conclusions. The results revealed that the original Ohlson (1995) model, the Collins et al. (1997) and the recent EBITDA variations yielded equally valid demonstrations of the association of accounting information with share price variations. Consequently, depending on the choice of model, all three variables, EBITDA, earnings and residual income, appear to possess an equal amount of explanatory power to account for variations in equity share prices. The study’s major contribution is to clarify the explanatory power of Ohlson-based models and the specification of variables, as well as methodological and analysis issues that could inform future research in the field. Keywords: EBITDA; equity valuation; Ohlson (1995) residual income valuation framework; value relevance; alternative performance measures; fundamental valuation; intrinsic equity valuation. JEL classification codes: M41; G10, G12; G14; G11; G3

THE DEVELOPMENT OF A HUMAN CAPITAL MEASUREMENT AND DISCLOSURE RESEARCH INSTRUMENT FOR THE ZIMBABWEAN MINING COMPANIES

Purpose: The aim of this study is to develop a research instrument to measure and disclose human capital value in the financial statements. The study has been motivated by a lack of guidelines that determine key aspects of human capital despite its contribution to value creation and financial performance. Methodology: This study adopted a post-positivist research philosophy which endorses a quantitative research approach. Quantitative data were collected using the survey questionnaire instrument from the six listed mining companies in Zimbabwe. A convenience sampling technique was utilised and a human capital measurement and disclosure instrument was validated using the exploratory factor analysis. Findings: The paper established eight factors namely; human capital measurements, profitability measures, employee competencies, value drivers, performance-related factors, market-related factors, employee exposures and structure-related factors. The developed questionnaire instrument can be of use to other scholars and policymakers if their studies are aiming to investigate the respondents’ perceptions towards human capital reporting. This will also, provide a basis for the development of a standardised universal approach to measuring human capital value

AN OVERVIEW OF THE USE OF CLAWBACK AS A GOVERNANCE MECHANISM ON EXECUTIVE REMUNERATION IN SOUTH AFRICA

The use of malus and clawback provisions has increased in recent years due to the demand for tighter controls on incentive-based compensation. The alignment between executive pay and individual performance creates a culture of responsible decision-making and accountability within an organisation. This paper seeks to evaluate the current state of governance legislation on the clawback of remuneration in the South African context. A systematic literature review was conducted to provide descriptive insight on the technical and procedural approach applied to the clawback of remuneration. These findings were then compared to other countries so that similarities, differences, and areas of further research could be identified. Through detailed content analysis, it was found that the South African governance regime lags behind its international counterparts regarding remuneration clawback. Due to the absence of relevant statutory guidelines, discretion is frequently applied, leading to inconsistent treatment of clawback amongst listed companies. The use of clawback as a risk-mitigation mechanism is also relatively new in South Africa and comparative studies provide useful insight on the technicalities and administration processes applied abroad. The lessons learnt and strategies applied internationally serve as a benchmark for the development of clawback legislation in South Africa

A Critical Review of the Characteristics of Presumptive Tax Systems in Developing Countries

This paper considers the effect of the presumptive tax system characteristics on the tax compliance behaviour of small businesses in developing countries. Since the concept of presumptive taxation involves several features influencing the formalisation of small businesses, this paper seeks to survey three key areas of literature: targeted taxpayers, thresholds and timeframe. This paper differs fundamentally from previous studies in that it analyses presumptive tax system characteristics. A descriptive review approach was followed in evaluating the empirical literature on presumptive tax system characteristics. A content analysis was then performed on literature about categories and subcategories provided in the classification framework. The review highlights similarities and conflicting evidence of presumptive tax system characteristics in transforming the compliance behaviour of small businesses. It was concluded that the blended use of information technology and existing presumptive tax systems can facilitate the movement of small businesses from the informal to the formal sector

The role of the Zimbabwean government in the implementation of management accounting among small and medium enterprises

PURPOSE: This paper aimed to investigate the role of the Zimbabwean government in the implementation of Management Accounting Practices (MAPs) among Small and Medium Enterprises (SMEs). Management accounting is a crucial instrument for success, particularly for SMEs, according to earlier studies. The study noted that there is a dearth of literature on the government's support for the adoption of management accounting SME sector.METHODOLOGY: Semi-structured interviews were used to gather information from 88 participants. Zimbabwe has no SME database, hence, a chain referral sampling technique was used. The data were interpreted using qualitative content analysis.FINDINGS: The study found that there is little that is done by the Zimbabwean government in promoting the use of management accounting among SMEs The areas covered in government-sponsored training for SMEs are bookkeeping, entrepreneurship, and tax preparation; management accounting is not addressed.ORIGINALITY/VALUE: In order to increase public understanding of MAPs, the research advises the Zimbabwean government to conduct seminars, launch awareness-raising campaigns, and establish policies that encourage the use of management accounting.peer-reviewe

The value relevance of EBITDA and book values: Evidence from the Johannesburg Stock Exchange

Orientation: This paper stems from Ohlson’s valuation framework, where residual income as a variable was substituted by the non-Generally Accepted Accounting Practices (GAAP) measure of earnings before interest, taxes, depreciation and amortisation (EBITDA). Research purpose: The primary purpose was to determine whether EBITDA, together with the book value of equity (BV), could be shown to be value relevant by means of an intrinsic equity evaluation model. Secondary hereto was to focus on the value relevance of the residual between EBITDA and traditional bottom-line earnings, namely interest, taxes, depreciation and amortisation (ITDA). Motivation for the study: The concern is that the current evidence value relevance of EBITDA offered in the literature has been premised on relative valuation approaches, meaning they are primarily anecdotal. Research approach/design and method: Cross-sectional ordinary least square regression analyses were applied from the top 100 largest companies listed on the JSE, from 1995 to 2017. Main findings: The results demonstrated that EBITDA, ITDA and BV accounted for significant variations in equity share prices when controlling for the confounding effects of scale, growth and the incidence of reported accounting losses. Practical/managerial implications: Ultimately, these findings should be seen to confirm the validity of EBITDA as an alternative input to bottom-line earnings in the valuation of equity shares. Contribution/value add: The study extends the debate by providing an alternative perspective based upon Ohlson’s residual income valuation framework, in respect of which there has currently been a paucity of evidence

An evaluation of interest deduction limitations to counter base erosion in South Africa

Background: The Organisation for Economic Cooperation and Development (OECD) made a number of recommendations in relation to interest deduction limitations as part of the Base Erosion and Profit Shifting (BEPS) project. In 2016 the South African National Treasury indicated that the interest deduction limitations contained in the Income Tax Act would be reviewed in the light of these recommendations.   Aim: This paper aimed to describe funding structures of companies in South Africa liable for tax and how this relates to other characteristics, including ownership, of the companies.   Setting: The research was performed using data from tax returns submitted by companies liable for income tax in South Africa.   Methods: This paper reports on descriptive analyses of the research conducted.   Results: The results showed that the mean interest-to-earnings before interest, taxes, depreciation, and amortisation (EBITDA) ratio for certain foreign-owned entities differed significantly from that of domestically owned entities.   Conclusion: The results may present evidence of profit-shifting activities. They also highlight trends in interest-to-EBITDA ratios that may be of relevance for future legislative developments. Further related research is required if interest deduction limitations in the South African tax legislation are to be reviewed in light of the OECD proposals

Global, regional, and national burden of chronic kidney disease, 1990–2017 : a systematic analysis for the Global Burden of Disease Study 2017

Background Health system planning requires careful assessment of chronic kidney disease (CKD) epidemiology, but data for morbidity and mortality of this disease are scarce or non-existent in many countries. We estimated the global, regional, and national burden of CKD, as well as the burden of cardiovascular disease and gout attributable to impaired kidney function, for the Global Burden of Diseases, Injuries, and Risk Factors Study 2017. We use the term CKD to refer to the morbidity and mortality that can be directly attributed to all stages of CKD, and we use the term impaired kidney function to refer to the additional risk of CKD from cardiovascular disease and gout. Methods The main data sources we used were published literature, vital registration systems, end-stage kidney disease registries, and household surveys. Estimates of CKD burden were produced using a Cause of Death Ensemble model and a Bayesian meta-regression analytical tool, and included incidence, prevalence, years lived with disability, mortality, years of life lost, and disability-adjusted life-years (DALYs). A comparative risk assessment approach was used to estimate the proportion of cardiovascular diseases and gout burden attributable to impaired kidney function. Findings Globally, in 2017, 1·2 million (95% uncertainty interval [UI] 1·2 to 1·3) people died from CKD. The global all-age mortality rate from CKD increased 41·5% (95% UI 35·2 to 46·5) between 1990 and 2017, although there was no significant change in the age-standardised mortality rate (2·8%, −1·5 to 6·3). In 2017, 697·5 million (95% UI 649·2 to 752·0) cases of all-stage CKD were recorded, for a global prevalence of 9·1% (8·5 to 9·8). The global all-age prevalence of CKD increased 29·3% (95% UI 26·4 to 32·6) since 1990, whereas the age-standardised prevalence remained stable (1·2%, −1·1 to 3·5). CKD resulted in 35·8 million (95% UI 33·7 to 38·0) DALYs in 2017, with diabetic nephropathy accounting for almost a third of DALYs. Most of the burden of CKD was concentrated in the three lowest quintiles of Socio-demographic Index (SDI). In several regions, particularly Oceania, sub-Saharan Africa, and Latin America, the burden of CKD was much higher than expected for the level of development, whereas the disease burden in western, eastern, and central sub-Saharan Africa, east Asia, south Asia, central and eastern Europe, Australasia, and western Europe was lower than expected. 1·4 million (95% UI 1·2 to 1·6) cardiovascular disease-related deaths and 25·3 million (22·2 to 28·9) cardiovascular disease DALYs were attributable to impaired kidney function. Interpretation Kidney disease has a major effect on global health, both as a direct cause of global morbidity and mortality and as an important risk factor for cardiovascular disease. CKD is largely preventable and treatable and deserves greater attention in global health policy decision making, particularly in locations with low and middle SDI