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The Link between Internal Financial Performance and External Financial Performance: Empirical Evidence from South African Firms

Author

Listed:
  • Elda du Toit
  • John H. Hall
  • Rudra P. Pradhan

    (University of Pretoria)

Abstract

This study uses two different indicators of external financial performance, namely market price per share and market value added; and six different indicators of internal financial performance, namely dividend per share, earnings per share, economic value added, price earnings ratio, return on assets, and return on equity, to examine the long-run relationship between internal financial performance and external financial performance of South African firms from 2004 to 2016. Using cointegration techniques, the study finds evidence of a long-run relationship between the internal financial performance and external financial performance of firms in most of the cases, typically with reference to these two sets of indicators. Using the Granger causality test, we find the presence of both unidirectional and bidirectional causality between the internal financial performance and external financial performance of firms. However, these results vary from case to case, depending upon the types of internal financial performance and external financial performance used in the empirical investigation process.

Suggested Citation

  • Elda du Toit & John H. Hall & Rudra P. Pradhan, 2017. "The Link between Internal Financial Performance and External Financial Performance: Empirical Evidence from South African Firms," The African Finance Journal, Africagrowth Institute, vol. 19(1), pages 70-98.
    • Handle: RePEc:afj:journl:v:19:y:2017:i:1:p:70-98
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    Keywords

    Internal financial performance; external financial performance; cointegration; Granger causality; South African firms; market value added; market price per share;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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