The relationship between a black economic empowerment score and shareholder returns in Johannesburg Stock Exchange-listed companies

Abstract

One of the major initiatives to redress the social and economic injustices of apartheid in South Africa is the black economic empowerment (BEE) legislative framework currently enacted by government. One of the core tenets of BEE is to facilitate the inclusion of previously disadvantaged blacks as shareholders of companies, thereby providing them with a stake in the economy. Since these new shareholders lack the means to acquire shares, existing shareholders devise various mechanisms which, in essence, bestow scrip on the newcomers, and simultaneously open up opportunities for BEE-compliant companies to benefit. Studies into the impact of BEE on shareholders have delivered conflicting findings, with some showing significant benefits to existing shareholders while others contradict this. The present study examines the association between a company’s BEE score/rating and shareholder returns, using an event study methodology and a buy-and-hold portfolio analysis to understand both the short- and long-term effects of a company’s BEE score. The authors observed a positive association between a change in BEE score and abnormal returns in the short term. In the longer term, portfolios which were comprised of companies with better BEE scores generated lower returns than those with worse BEE scores – a surprising phenomenon which may be attributable to the high cost of BEE compliance. These results add weight to the existing body of literature which questions the efficacy of BEE.