Abstract
This study investigates the determinants influencing the probability of delisting from the Johannesburg Stock Exchange (JSE), particularly in South Africa as a developing economy. Addressing a shortcoming in the existing literature, this research uniquely integrates financial, non-financial and macroeconomic determinants to provide a comprehensive analysis of the delisting decision. Unlike previous studies that have typically focused on either financial or non-financial factors, this study offers an extensive examination that includes all three dimensions, filling a notable limitation in holistic understanding. Moreover, there has been very little research that follows this comprehensive approach in emerging economies such as South Africa.
Companies list on stock exchanges primarily to raise capital for growth and development, which plays a critical role in stimulating the local economy. An effective stock exchange allocates capital efficiently, fosters competition and innovation and enhances economic growth. However, this ideal scenario is increasingly being undermined by the high rate of company delistings, which consume publicly traded capital, reduce investor opportunities and diminish economic activities, posing a threat to economic stability. Consequently, understanding the factors that lead to delisting becomes imperative for maintaining market health and economic vitality.
The literature review underscores several crucial determinants of delisting decisions. Financial determinants, including cost management, company growth and visibility, play a vital role in maintaining investor confidence, sentiment and market presence. Non-financial determinants, such as governance practices and leadership quality, also impact a company's operational stability and strategic direction. Additionally, macroeconomic determinants, like economic stability, influence delisting probabilities.
The study employs several theoretical frameworks, including agency theory, bonding theory, signalling theory and stakeholder theory, to underpin the analysis of delisting determinants. Agency theory highlights the role of governance practices in mitigating delisting risks, while bonding theory focuses on the benefits of adherence to stringent governance standards. Signalling theory provides insights into how companies can communicate financial health to investors, and stakeholder theory emphasises the importance of considering the interests of all stakeholders in decision-making processes.
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Despite extensive research on various aspects of financial markets, there is a limited understanding of the comprehensive set of determinants that influence delisting decisions, particularly in developing economies like South Africa. This research aims to fill that limitation by providing a detailed analysis that encompasses a broader range of determinants than previously studied. The aim of this study is to determine how and to what extent a combination of financial, non-financial and macroeconomic determinants could influence the decision to delist from the JSE. This addresses the need for a holistic explanation of the delisting decisions of companies on the JSE, incorporating financial, non-financial and macroeconomic determinants. Given the inherent linkage between company survival, performance and distress, this research provides a comprehensive understanding of the determinants influencing the likelihood of delisting. By identifying relevant determinants, employing rigorous statistical analysis and developing practical recommendations, this study enhances predictive accuracy regarding delisting probabilities and offers actionable insights for stakeholders.
Methodologically, the study adopts a mixed-methods approach, beginning with a systematic literature review to identify and categorize critical financial, non-financial and macroeconomic determinants. This is followed by the application of Principal Component Analysis (PCA) to reduce the dimensionality of financial and non-financial variables. Descriptive statistical analysis, including trend analysis, is then performed to reveal temporal patterns and variations in these determinants. Utilizing a multivariate panel probit regression model, the study assesses the impact of significant determinants on delisting likelihood. Content analysis of 'circulars' from delisted companies categorizes delisting methods, such as schemes of arrangement and management buyouts, and further multivariate panel probit regression models determine associations between delisting determinants and delisting methods. Finally, a comparative analysis of multivariate panel probit regression models for listed companies versus those delisted and those delisted due to prominent methods provides nuanced insights into the key factors driving delisting decisions within the South African context. The sample in this study comprises 302 companies that delisted from the JSE between 2010 and 2023. Data for financial, non-financial and macroeconomic determinants (variables) were collected from 2000 to 2023 to conduct a thorough analysis. A control group of 302 companies that remained listed as of 31 December 2023, was also included to facilitate comparative analysis and validate the findings.
The study also compares three independent multivariate panel probit regression models: Model 1 includes all determinants without differentiation between delisting methods, Model 2 focuses on
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determinants specific to schemes of arrangement and Model 3 examines determinants associated with non-compliance with JSE listing requirements. This comparative analysis provides a nuanced understanding of how different determinants influence delisting decisions under various scenarios and in different contexts.
The findings of this study reveal that efficient cost management, company growth and visibility are critical financial determinants, while robust governance practices and leadership quality are significant non-financial determinants. For example, the study found that companies with poor governance practices are more likely to engage in delisting, suggesting that improving governance standards can reduce delisting risks. Consequently, one implication of this finding is the need for regulatory bodies to enforce stricter governance frameworks. A corresponding recommendation is for companies to regularly review and enhance their governance structures to ensure compliance with these frameworks. Macroeconomic stability also substantially impacts delisting probabilities.
The implications of this research are multifaceted. For companies, it emphasises the importance of maintaining robust financial management, governance practices and leadership quality to mitigate delisting risks. For regulators, the findings underscore the need for stringent regulatory frameworks that ensure financial stability and corporate governance. Investors can use these insights to make informed decisions, enhancing market confidence, sentiment and stability. The recommendations provided in this study can guide stakeholders in implementing strategies to reduce the likelihood of delisting and promote a stable market environment.
In conclusion, this research addresses the delisting conundrum on South African exchanges, empowering stakeholders with possible strategies to build a more resilient and prosperous future for the financial market. While the focus is on the South African context, the issue of delisting is a global concern, affecting exchanges worldwide. By unravelling the delisting conundrum on South African exchanges, this study not only provides localised solutions but also contributes to the broader understanding of delisting dynamics on a global scale. Ultimately, it lights the path towards a stable and thriving market landscape, offering valuable insights that resonate beyond South Africa’s borders. This study offers vital perspectives that could redefine approaches to market stability and investor confidence. It provides a journey through the complexities of financial sustainability, aiming to enhance understanding and strategies in this crucial area.