The South African Companies Act of 2008 (SACA2008), and the Sarbanes‐Oxley Act of 2002: Implications for corporate financial valuations reliant on the cost of capital

The South African Companies Act of 2008 (SACA2008) seeks to reaffirm the company as a means of promoting the economic welfare and development of South Africa by encouraging efficient, transparent value‐additive corporate management. The purpose of this paper is to present the important role of the cost of capital for financial valuations that are consistent with the purposes of SACA2008, as stated in Section 7.

The relevant sections of SACA2008 of this legislation were studied. The role of the cost of capital in performing and interpreting financial valuations was presented. As the CAPM is widely used, and in cases is the only approach used to estimate the cost of capital, an update of CAPM empirical evidence was presented to affirm the conclusion by Fama and French that the CAPM is not an acceptable way of estimating the cost of capital. The Sarbanes‐Oxley Act of 2002 (SOX) was studied to ascertain the implication of using valuation criteria that lack empirical validity.

Management that makes financial decisions on the basis of criteria that have not been empirically validated may find it difficult to defend challenges to their efforts at complying with SACA2008 and promoting the success of the company.

From an extensive survey of publicly available literature, there is no evidence to suggest that research on the role of the cost of capital in helping achieve the purposes of SACA2008 has been published. Without a valid and reliable cost of capital it will be difficult to achieve the purposes of this legislation.