An evaluation of the market rating of retained earnings of companies listed on the Johannesburg Stock Exchange: An empirical analysis

Abstract

ABSTRACTThis investigation evaluates the efficiency of retained earnings of a sample of 50 companies listed on the Johannesburg Stock Exchange during the period 1978–1987. The empirical evidence shows that company managers are not always efficient in deciding how much profits should be retained for reinvestment. While, on average, the companies in the sample benefitted from an increase in market price associated with retained earnings, the majority of companies were penalized by the decision to retain earnings. There appears to be no correlation between the popular measures of company performance and the three measures representing shareholder interests.Given the limitations of return on equity and other company performance measures, appropriate ratios are suggested which could be used to measure shareholder interests as well as operational decision criteria for company performance evaluation. The use of the suggested ratios could assist in removing the various impediments and structures which prevent sha...