Share pricing of South African banking groups : importance of efficiency and earnings per share

Abstract

Previous research findings indicate that the relevant performance of firms is one way or another, reflected in the market prices of shares. Such research is focussed on different performance components of firm individual risk (FIR), but none of the research segregates systematic and unsystematic risk of the shares to levels where the relative FIR components that were researched could be quantified in proportion to FIR level share price determinants. This brings about the objective of this research to segregate the pricing of shares in terms of market and firm specific factors with the intention to quantify the association of relative bank efficiency and earnings performance with the pricing of South African bank shares. The study draws a parallel between the actual significance of measured efficiency and earnings per share (EPS) with share pricing and quantified FIR. Within this context the comparative significance of measured efficiency and EPS are explored to investigate the Efficient Market Hypothesis (EMH) prevalence. An analysis of efficiency and share price relationships at different financial year time points shows a semi-strong form of the EMH in both the pre- Global Financial Crises (GFC) and GFC periods. This indicates that the application of an active investment strategy by investors based on efficiency measures may be beneficial. The impact of EPS as contributing determinant of share prices increased during the GFC period compared to the pre-GFC period, but reflects a strong form of the EMH.