Slow JSE share prices leave corporate investment and cash decisions to managerial ability and monitoring
Introduction
Textbook financial management leans on the share price as a referee. Managers pick projects that clear a market-based hurdle rate, hold the cash the business needs, and if they get it wrong the market punishes them. That story works only if prices absorb information quickly and fairly. On the Johannesburg Stock Exchange (JSE) the evidence suggests they do so partly and sometimes slowly, with a post-announcement drift of about thirty days after profit warnings and upgrades (Bhana, 2021) and investment holding companies whose discounts to net asset value kept widening (Schwenke, Sebastian and Maroun, 2024).
This paper argues that where prices correct slowly on the JSE, the quality of capital budgeting and liquidity decisions in South African firms depends more on managerial ability and on how closely shareholders monitor managers than on market discipline (Obagbuwa, Kwenda and Akinola, 2021; Chireka and Moloi, 2024). That is a claim about emphasis, and it does not say markets play no role at all. It begins with what JSE prices do and do not tell managers, then turns to the evidence on investment efficiency, then to cash and working capital, and finally to behavioural finance, where the South African literature is thinnest. A caution runs throughout. The sources are mostly panel studies of listed firms, they rarely observe how projects are actually appraised, and several rely on proxies for ability and monitoring that readers should treat with some care (Obagbuwa, Kwenda and Akinola, 2021; Chireka and Moloi, 2023). Where the evidence stops, the paper says so (Schwenke, Sebastian and Maroun, 2024).
What JSE prices tell managers, and how quickly
Bhana (2021) used an event study of Top 100 JSE companies since trading statements became a requirement in 2010. There appeared to be information leakage before statements were released, which is a sign that the market is picking things up early. For profit warnings the poor earnings looked largely priced in before the announcement. Profit upgrades were different, because the market seemed cautious and wanted confirmation before reacting further. After the announcement, a drift lasting thirty days remained, which sits awkwardly with the efficient market hypothesis. So prices are doing something sensible, but not the same thing for good news and bad, and not all at once. Bhana’s suggestion that managers should spread earnings surprises more widely than the regulatory announcement alone points to a practical lesson (Bhana, 2021).
The JSE also reacts to news that has nothing to do with local firms. Alfonso, Botha and Pelcher (2023) modelled volatility and ran an event study, and found that US unemployment announcements had a statistically significant negative effect on the JSE. Interest rate announcements made in August 2008, during the global financial crisis, also mattered, whereas the early COVID-19 period did not show a statistically significant impact in their event study. That last result is a little surprising, and it reminds us that results of this kind can be sensitive to the methods and windows chosen. For a financial manager the point is plain enough. A hurdle rate or a share price taken at one moment includes a good deal of external noise, and it would be risky to read it as a clean verdict on any single firm’s projects (Alfonso, Botha and Pelcher, 2023; Bhana, 2021).
Prices can also stay stubbornly wrong for long stretches. Schwenke, Sebastian and Maroun (2024) looked at JSE-listed investment holding companies, most of which trade below the intrinsic net asset value they report. They found that the discount widened and that corporate actions did not reduce it to any significant degree. Their reading is that the discount reflects market perceptions of management, and that the only route to narrowing it is to show an ability to allocate capital and earn returns above the cost of capital. Disclosure seems to matter for that cost as well. Ngcobo and Sibanda (2021) studied JSE-listed mining firms and found a significant negative relationship between integrated reporting scores and both the cost of equity and analysts’ forecast errors. Taken together, these studies suggest that the discount rate in a capital budget is partly something managers influence through what they tell the market (Ngcobo and Sibanda, 2021; Schwenke, Sebastian and Maroun, 2024).
These results do not line up neatly, and that is worth saying. Bhana (2021) finds a market that is slow on firm-specific news, Alfonso, Botha and Pelcher (2023) find one that reacts to foreign macroeconomic news, and Schwenke, Sebastian and Maroun (2024) find one that holds a discount for years. Efficiency, in other words, is not one property that the JSE either has or lacks. It seems to vary with the kind of information and the kind of firm. Different samples, years and methods are involved, so the comparison is loose. Still, the common thread is that a manager cannot count on the price to have settled by the time a decision is due (Bhana, 2021; Schwenke, Sebastian and Maroun, 2024).
Investment efficiency when nobody is checking
If the market does not discipline managers quickly, shareholders have to. Obagbuwa, Kwenda and Akinola (2021) tested this on JSE-listed companies between 2004 and 2019, using a generalised method of moments approach. Where institutional shareholders were distracted, investment inefficiency went up. The authors read this as monitoring intensity dropping, leaving executives free to take on investments that are not profitable. It is a useful finding for anyone teaching capital budgeting, because it says the technique on paper (net present value, internal rate of return and so on) can be undone by weak oversight. The study measures inefficiency from firm data, though, and does not observe the appraisal itself (Obagbuwa, Kwenda and Akinola, 2021).
A second study points the same way from a different angle. Obagbuwa and Munzhelele (2024) used a Richardson residual model on 17 energy and mining firms between 2015 and 2022, to see whether green investment was above or below its estimated optimal level. The firms did not behave consistently. They moved between overinvestment and underinvestment, and in the later years underinvestment dominated. The authors call for stronger oversight and clearer environmental policy. Seventeen firms in two heavy industries is a narrow base, so the result should not be stretched to the whole market. Even so, together with the monitoring evidence, it hints that investment that looks wrong against a benchmark is common and is not simply a failure of technique (Obagbuwa and Munzhelele, 2024; Obagbuwa, Kwenda and Akinola, 2021).
What these papers do not tell us is how South African managers choose projects day to day. Neither observes the hurdle rate used, the forecasting of cash flows, or the weight given to payback against net present value, so the inference that appraisal quality is driven by governance is indirect (Obagbuwa and Munzhelele, 2024; Obagbuwa, Kwenda and Akinola, 2021). That matters for an MBA reader, because a study of residuals shows that something went wrong without saying which step failed. Schwenke, Sebastian and Maroun (2024) come closest to naming a cause when they link the market discount to doubts about capital allocation, and even there it is a perception that the market holds, with no measured fact about project selection behind it.
The South African context adds one more wrinkle. The first Obagbuwa study draws on JSE-listed companies and the second concerns energy and mining firms, where environmental policy and regulation help determine what counts as an acceptable level of investment. When the authors of the green investment study ask for stronger oversight and clearer policy, they are asking public bodies to supply a check that the market does not (Obagbuwa and Munzhelele, 2024). That is a reasonable point, though it moves some of the burden from managers to regulators and says little about how a given board should respond. The monitoring evidence, by contrast, speaks directly to institutional shareholders and their attention (Obagbuwa, Kwenda and Akinola, 2021).
Cash, working capital and the managers who run them
Liquidity decisions look like the opposite of capital budgeting, short-term and routine, but the evidence on JSE firms shows the same dependence on managers. Chireka and Moloi (2023) examined 143 non-financial JSE firms from 2000 to 2020 with two-step and system GMM estimators. They found evidence of optimal cash levels and an average speed of partial adjustment of 75.6 per cent, so firms close most of any gap to target in each period. However, firms run by highly able managers adjusted more slowly. The authors do not settle why. One reading, and it is only an inference, is that able managers tolerate deviations from target on purpose, perhaps to keep room for opportunities, while weaker managers simply drift back to a rule of thumb (Chireka and Moloi, 2023).
The companion study connects cash to value. Chireka and Moloi (2024) used panel data on JSE non-financial firms for 2000 to 2020 and found an inverted U-shaped link between cash holdings and firm value. Value rose with cash up to an ideal level and fell beyond it. The effect of cash on value was greater where managers were highly able. This fits the trade-off idea of an optimum, and it implies that a rand sitting in the bank is not worth the same in every firm, because the value depends on who controls it. A fair question, which the abstracts leave unanswered, is how managerial ability is measured and whether the measure picks up talent or just firm characteristics that happen to correlate with it (Chireka and Moloi, 2024; Chireka and Moloi, 2023).
Smaller firms show a different problem, and it is one that gets less attention than it deserves. Otto (2023) surveyed 10 450 small and medium-sized enterprises in South Africa about their trade credit management, and they perceived it as effective. Yet the author points out that SMEs continue to fail at high rates, and argues that other financial problems, apart from trade credit, need to be investigated as root causes. The result does not prove that owners are overconfident. It does show a gap between how owners rate their own receivables and payables practice and how enterprises actually do, which is what behavioural finance would lead one to look at next (Otto, 2023). The comparison with the listed-firm studies is rough, since SMEs and JSE firms face different suppliers and customers, but both groups appear to rely on managerial judgement at a point where measured outcomes are hard to see (Otto, 2023; Chireka and Moloi, 2024).
Cash is only one slice of working capital, and that limits what can be claimed here. None of the listed-firm studies in this set looks at inventory days or receivables collection in the large JSE firms, and the trade credit work covers small enterprises (Otto, 2023). So any statement about working capital management as a whole in South African firms is an extension of the cash evidence, and a loose one. A reader who wanted to test the claim properly would need data on the full cash conversion cycle for listed firms, set against the ability and monitoring proxies used by Chireka and Moloi (2023). The existing work offers a direction to follow, not a finished answer.
Where behavioural finance fits, and where the evidence stops
Behavioural finance asks whether human biases produce irrational decisions. In South Africa its best-documented application is on the household side. Hyland, Sebastian and Seetharam (2021) used an explanatory case study of Discovery Bank, drawing on interviews with key employees, academic research and artefacts, and judged the bank’s business model to be grounded in behavioural finance theory to a significant extent. The bank leans on incentives more than on nudges to change behaviour. That is a real application, but it concerns customers deciding about personal finance, and the authors themselves say the practical implications for the wider industry are largely unexplored (Hyland, Sebastian and Seetharam, 2021).
For corporate decisions the link to bias is less direct. None of the corporate studies above tests a named bias such as overconfidence or loss aversion in capital budgeting. Obagbuwa, Kwenda and Akinola (2021) describe a monitoring failure, and Chireka and Moloi (2023) describe managerial ability. These could in principle reflect biased judgement, but each paper frames the issue differently, and one should be careful about relabelling them. What the combined evidence does permit is a modest statement. Slow price correction removes one check on managers, and the personal characteristics of the people deciding then carry more weight. Whether those characteristics include predictable biases remains open (Chireka and Moloi, 2024; Hyland, Sebastian and Seetharam, 2021).
There is also a methodological limit to flag. The studies cover different periods, from 2000 to 2022, and use proxies that are not directly comparable, and the one study that used two methods reported different things from each of them (Alfonso, Botha and Pelcher, 2023). A manager reading them should hold the conclusions loosely, using them to ask better questions inside the firm. How quickly do our own project forecasts get checked against outcomes, and who is watching the people who sign them off (Obagbuwa and Munzhelele, 2024; Ngcobo and Sibanda, 2021)?
If behavioural insights do reach the corporate side, the Discovery Bank case hints at one form they might take. The bank’s tools rely on incentives more than nudges (Hyland, Sebastian and Seetharam, 2021). A firm worried about drifting cash balances or unprofitable projects might likewise tie managers’ rewards to cash targets or to returns above the cost of capital, which is the test Schwenke, Sebastian and Maroun (2024) suggest is the only way to narrow the discount. This is speculation built on two studies of very different settings, so it should be read as a prompt for research and for boardroom discussion and not as a finding.
Conclusion
The JSE is an informative market but not a fast or tidy one. Prices leak news before announcements, keep drifting for weeks afterwards, react to US unemployment figures, and leave some holding companies at stubborn discounts (Bhana, 2021; Alfonso, Botha and Pelcher, 2023). When the referee is that slow, other checks carry the load. This whole argument rests on a small set of South African studies, and a few of them are single-industry or single-case, so it is a working position and not a settled result. The evidence from South African firms points to shareholder monitoring in the quality of investment, and to managerial ability in the handling of cash (Bhana, 2021; Obagbuwa, Kwenda and Akinola, 2021; Chireka and Moloi, 2024).
Three practical points follow. Treat market-based inputs such as the cost of equity as figures partly shaped by disclosure and noise, not as fixed facts (Ngcobo and Sibanda, 2021). Keep monitoring intensity up, because distracted owners seem to pay for it in weaker investment (Obagbuwa, Kwenda and Akinola, 2021). And expect more from future research on actual appraisal practice and on named biases in South African boardrooms, because for now that part of the argument rests on inference (Otto, 2023; Hyland, Sebastian and Seetharam, 2021).
Reference list
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