The association between inflation-adjusted accounting income and the behaviour of share prices

Gevers, Willem Rudolf (1992-12)

Thesis (PhD (Business Management))--University of Stellenbosch, 1992.

Thesis

ENGLISH ABSTRACT: In this dissertation the association between inflation-adjusted data and the behaviour of share prices is investigated. The primary purpose of this investigation is to make a contribution to the body of knowledge regarding share price behaviour, and more specifically with respect to the relationship between inflation accounting and the share market. The disclosure of inflation-adjusted data is not mandatory in South Africa, and few companies have disclosed supplementary current cost income statements. A somewhat larger number of companies make provision for inflation in their financial results by revaluing their assets and accounting for additional depreciation. Prior to 1984 a fair proportion of the companies listed on the Johannesburg Stock Exchange also used the LIFO method of inventory valuation. The disclosed inflation-adjusted data is very limited, necessitating the estimation of the inflation-adjusted data. To estimate the inflation adjustments, a number of inflation accounting models were developed based either on AC 201 or other suggestions found in the literature. These models were then applied to the financial results of listed industrial companies. In the first empirical analysis contained in this dissertation the inflation adjustments generated by the various models were compared to identify unique models for further use in the market related empirical work. From this analysis it was established that AC 201 is open to such a divergent interpretation that significantly different inflation adjustments are generated. From the literature reviewed, three research designs showed promise for application to the market related empirical analyses. The first design used was the event study which was used to evaluate the share market's reaction to the abolition of the tax benefits associated with the LIFO method of inventory valuation. The share market showed no significant reaction for a period of 21 weeks surrounding the announcement, making possible statements regarding the relative efficiency of the Johannesburg Stock Exchange impossible. It was, however, established that the research design used is very sensitive to sample formation, and it is recommended that special care should be used in market related studies to ensure that both operating and holding companies are not included in the same sample. The second research design used was the incremental information content design. Limited incremental information content was found in the inflation-adjusted income for companies which disclosed no inflation adjustments. For companies that did disclose some aspects of inflation accounting, the inflation-adjusted income was often the better explanatory variable of the residual share returns, but no incremental information content could be detected. Based on analyses performed on single years of data it was found that the inflation-adjusted income was as good an explanatory variable of the residual share returns as the historic cost variable. The final research design used was the income measurement perspective. It was found that in general the historic cost income behaved as expected, but the inflation adjustment to income seldom displayed any income measuring properties. The only inflation accounting model that displayed signs of income measurement properties contained as part of its adjustment unrealised holding gains on fixed assets. This could be a indication that the disclosure of unrealised holding gains could be useful. The lack of results found for AC 201 possibly points to its inadequacy. In general the relationship between the inflation-adjusted data and the share market was found to be very weak.

AFRIKAANSE OPSOMMING: In hierdie proefskrif word die verwantskap tussen inflasie-aangepaste data en die gedrag van aandeelpryse ondersoek. Die primere doel met hierdie studie is om by te dra tot die kennis oor die gedrag van aandeelpryse, en dan meer spesifiek met betrekking tot die verwantskap tussen inflasie-rekeningkunde en die aandelemark. In Suid-Afrika is dit nie verpligtend om inflasie-aangepaste data bekend te maak nie, en min maatskappye publiseer 'n aanvullende inkomstestaat van huidige koste. 'n Ietwat groter aantal maatskappye maak voorsiening vir inflasie in hul finansiele resultate deur hul bates te herwaardeer en addisionele waardevermindering af te skryf. Voor 1984 het 'n aantal maatskappye wat op die Johannesburgse Effektebeurs genoteer is, ook voorraad volgens die LIEU metode gewaardeer. Slegs beperkte inflasie-aangepaste data is dus beskikbaar, wat die skatting van sodanige data noodsaak. Om die inflasie-aangepaste data te kan skat, is 'n aantal inflasie-rekeningkunde modelle ontwikkel, op grond van of RE 201 of ander voorstelle in die literatuur. Hierdie modelle is daarna toegepas op die finansiele resultate van genoteerde nywerheidsmaatskappye. In die eerste empiriese ondersoek wat in hierdie proefskrif vervat is, is die inflasieaanpassings wat deur die onderskeie modelle gegenereer is, met mekaar vergelyk om te bepaal watter uniek is vir gebruik in die markverwante empiriese ondersoek wat volg. Met hierdie ondersoek is vasgestel dat RE 201 so uiteenlopend vertolk kan word dat inflasie-aanpassings wat statisties beduidend van mekaar verskil, gegenereer word. Uit die literatuur wat bestudeer is, blyk dit dat drie verskillende navorsingsontwerpe geskik vir toepassing in die markverwante ondersoeke is. Die eerste ontwerp wat gebruik is, is die gebeurtenisstudie waarmee die effektebeurs se reaksie bepaal is op die afskaffing van die belastingvoordeel wat aan die LIEU-voorraadwaardasie gekoppel was. Die effektebeurs het gedurende die 21 weke rondom hierdie aankondiging geen betekenisvolle reaksie getoon nie. Dit maak enige afleidings oor die relatiewe doeltreffendheid van die effektebeurs onmoontlik. Daar is wel vasgestel dat die navorsingsontwerp baie sensitief vir die samestelling van die steekproef is. Dit word aanbeveel dat sorg gedra behoort te word dat 'n bedryfsmaatskappy nie saam met sy houermaatskappy in dieselfde steekproef opgeneem word nie. Die tweede navorsingsontwerp wat gebruik is, berus op die inkrementele inligtingsinhoud. Die inflasie-aangepaste inkomstesyfers van maatskappye wat geen aanpassings vir inflasie toon nie, bevat beperkte inkrementele inligting. Vir maatskappye wat wel inflasieaanpassings openbaar maak, is die inflasie-aangepaste inkomstesyfer dikwels die beste beskrywende veranderlike van die residuele aandeelopbrengste, maar geen inkrementele inligting kon gevind word nie. Uit ontledings wat op 'n jaarbasis uitgevoer is, kan daar afgelei word dat die inflasie-aangepaste inkomstesyfer net so 'n goeie beskrywende veranderlike van die residuele aandeelopbrengste as die historiesekoste-inkomstesyfer is. Die laaste navorsingsontwerp wat gebruik is, berus op die inkomstemetingsperspektief. In die algemeen is daar gevind dat die historiesekoste-inkomstesyfer volgens verwagting reageer, maar dat die inflasie-aanpassing selde enige inkomstemetingseienskappe bevat. Die enigste inflasie-rekeningkunde model wat tekens van inkomstemetingseienskappe toon, bevat ongerealiseerde houwinste op vaste bates as deel van sy regstelling. Dit kan beskou word as 'n teken dat die openbaarmaking van ongerealiseerde houwinste nuttig kan wees. Die gebrek aan betekenisvolle resultate vir RE 201 hou die moontlikheid in dat dit ontoereikend is. In die algemeen is gevind dat die verwantskap tussen inflasie-aangepaste data en die gedrag van aandele op die effektebeurs baie swak is.

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