First Look

Academics agree stock market good for SMEs

Mona School of Business | 2016-06-28 00:00:00

Researchers at Mona School of Business and Management (MSBM) are pointing to the raising of capital on the Jamaica Stock Exchange as a good bet for Small and Medium Enterprises (SMEs). Dr. William Lawrence and Dr.Twila-Mae Logan examined the performance of 19 Companies that listed on the Junior Market of the Jamaica Stock Exchange (JSE). Early research findings show that SMEs can transform their financial performance by listing on the stock exchange. They presented their preliminary findings at a MSBM Roundtable breakfast forum titled ‘Stock Market as Driver for Economic Growth’ held last week.

Lawrence and Logan tracked the performance of SMEs two years before and two years after their Initial Public Offering (IPO), using their return on assets and debt equity ratio as two important variables. They wanted to find in the first instance if there was a significant difference in the financial performance before IPO compared to performance after.  In the second instance the researchers wanted to see if there was likely to be negative relationship between a change in debt levels and a change in profitability.

Lawrence and Logan found that SMEs reduce debt and increase profitability following IPO on the Junior Stock Market. For every (mean average) one percent increase in profitability there was likely to be a 4.82 percent decrease in the amount of debt. The results of the study also contradict the long held assertion that a firm’s proportionof debt relative to equity is irrelevant in an environment free from income tax, such as the Junior Market.  According to Lawrence and Logan, public equity by way of IPO is crucial when firm’s goal is growth and not lowest cost of capital. The main implication of the findings is that SMEs can use the Junior Market as a channel to increase profitability while reducing financial risk.

Also speaking at the forum was General Manager for the Jamaica Stock Exchange (JSE), Marlene Street-Forrest. She reminded the gathering that the JSE was named by Bloomberg as the Best Performing Stock Exchange in 2015. She highlighted the performance of the JSE over the past 7 years, while the Main market recorded a positive return of 77 percent as measured by the index, the newly created Junior Market recorded positive returns of 2,100 percent. Mrs Street-Forrest renewed her call for a common trading platform throughout the Caribbean in the form of a Caribbean Stock Exchange.

Minister of State in the Ministry of   Finance and Public Service, Fayval Williams, encouraged the expansion of the Junior Stock Market. She pointed to  some of the benefits already derived. She noted that the JSE Junior Market was a net creator of jobs with over 3,100 more persons contributing to the tax coffers in addition to increased GCT being handed over through the companies.

Making his contribution to the forum, Professor Sir Hilary Beckles highlighted the negative effects of the splintering of Capital within the region and insisted that Jamaica was in a prime position to lead the charge to create a Caribbean Capital market. Former Finance Minister Peter Phillips spoke to broadening the scope of such a market to embrace Spanish-speaking and other countries of this region. Dr. Phillips was supported by JMMB’s Julian Mair who pointed to the performance of that company’s entrance into the Dominican Republic and Trinidad and Tobago and the extent to which those early decisions helped to consolidate the leadership role of the JMMB.

Posted By :Janice Henlin

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