Have you ever paused to think about how miraculous a stock exchange is?
First, there is the information it provides. A share price tells us how much a company is worth and how risky it is. Collectively, the share prices of listed companies reveal what investors are thinking about the health of an economy and its prospects.
Just like the odds on a horse race reveal the beliefs of betters about which horse will win, share prices reveal the beliefs of investors on how well companies are going to do in the future.
A stock index is a public barometer of expectations about our economy that is free for all of us to see.
Each listed company also provides significant financial information about itself. Such data are provided mostly because shareholders need them to oversee their investments, but once they are available, anyone can use them. Suppliers can see how creditworthy their customers are. Employees can see how solvent and reliable their employers are. Customers can see how profitable companies are and thereby whether they are exploiting monopoly power.
Everyone can see who owns the companies and therefore who exercises control. Also, anyone can buy into these companies, supporting returns on long-term savings as well as encouraging mergers and acquisitions where it would improve financial performance. Governments can see whether taxes are being paid appropriately. Indeed, because shareholders put pressure on companies to improve profitability and governance, listed companies tend to be much higher taxpayers than non-listed equivalents. Even those invested in unlisted companies benefit because the share prices of listed competitors are a guide to valuing non-listed shares.
For companies themselves, a listing bolsters the value of their shares because of the improved liquidity provided by the market. Then there is the enhanced corporate reputation that comes from the oversight and transparency of a listing. But there are downsides: the greater regulatory burden and the fact that everyone has access to a great deal of information about your firm. For society as a whole, a listing has nothing but benefits. We should do more to encourage them.
Of course, we could also make unlisted companies provide more information. The UK, for instance, makes the financial accounts of all registered companies publicly available. There is a good argument for enforcing this level of transparency, but the substantial interest from analysts, the financial media and shareholders in listed companies means the information is much more scrutinised and consequently more accurate.
Without a stock exchange, a financial system is unable to properly price equity, the essential form of finance that absorbs risk in a financial system. That makes the cost of starting companies far higher. This is one of the obstacles that less developed countries have to overcome, and is why many newly emerging countries have opened their own stock exchanges or are working toward doing so.
The World Economic Forum rates South Africa’s stock exchange regulation and company auditing standards the best in the world. Minority shareholder protection rules and capital raising on the JSE are rated nearly the best. This is a status to be proud of. The JSE ranks 19th in the world in market capitalisation while our economy ranks 29th. That is not as impressive as it looks — the JSE’s capitalisation includes a large amount accounted for by dual-listed companies that should not be fully attributed to the JSE, so in reality our exchange is probably in line with our GDP ranking.
There are a range of regulatory incentives that could encourage listings. Highly regulated industries, such as insurers, could be required to list as a licensing condition. The government can list its own enterprises, although the Telkom experience was a salient lesson in how this may hurt the market more than help it.
The participation of direct retail investors is vital. We should want as many people as possible to be interested in our companies. The more who have a direct interest, the more there are with an incentive to support a good business environment. That is one reason broad-based black economic empowerment deals are good.
We should all encourage a culture that recognises the great value listed companies bring to us.
Written by: Stuart Theobald
Picture credit: Business Day
- This article was published on Business Day.