MSBM says stock market good for small businesses

BY BALFORD HENRY Senior staff reporter

Tuesday, June 28, 2016

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Researchers at the Mona School of Business and Management (MSBM) are convinced that small and medium enterprises (SMEs) can transform their financial performance by listing on the stock exchange.

Information provided by the MSBM this week states that its researchers – Dr William Lawrence and Dr Twila-Mae Logan – examined the performance of 19 companies listed on the Junior narket of the Jamaica Stock Exchange (JSE) and concluded that raising capital on the stock exchange was a good bet for SMEs.

"Early research findings show that SMEs can transform their financial performance by listing on the stock exchange," MSBM reported.

The researchers presented their preliminary findings at a recent MSBM Roundtable Breakfast titled ‘Stock Market as Driver for Economic Growth’ hosted at the Mona Visitors’ Lodge at the University of the West Indies.

Lawrence, Director of the Professional Services Unit at MSBM, and Logan, MSBM’s lecturer in finance, 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 this event. In the second instance the researchers wanted to see if there was likely to be a 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 Market. The results of the study also contradict the long-held assertion that a firm’s proportion of 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 a 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, who 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 seven years. While the main market recorded a positive return of 77 per cent as measured by the index, the newly created Junior Market recorded positive returns of 2,100 per cent.

Street-Forrest also renewed her call for a common trading platform throughout the Caribbean in the form of a Caribbean Stock Exchange.

Another speaker, 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 more than 3,100 more people 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 the 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 entry 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.

This year’s event was the seventh in the series and was hosted in partnership with the Jamaica Stock Exchange and Inter-American Development Bank.

The partnership is significant, as the JSE is recognised globally, and has been ranked as the number 1 performing stock exchange in the world for 2015.

The IDB is funding a model similar to the Junior Stock Exchange, to be replicated regionally and internationally based on its success in Jamaica.

The IDB has been in support of entities like the JSE to improve SMEs’ access to equity financing since inception.


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