The Link between Internal Financial Performance and External
Financial Performance: Empirical Evidence from South
African Firms

Elda du Toit and John H. Hall
University of Pretoria

Rudra P. Pradhan
Indian Institute of Technology

ABSTRACT

This study uses two different indicators of external financial performance, namely market price per share and market value added; and six different indicators of internal financial performance, namely dividend per share, earnings per share, economic value added, price earnings ratio, return on assets, and return on equity, to examine the long-run relationship between internal financial performance and external financial performance of South African firms from 2004 to 2016. Using cointegration techniques, the study finds evidence of a long-run relationship between the internal financial performance and external financial performance of firms in most of the cases, typically with reference to these two sets of indicators. Using the Granger causality test, we find the presence of both unidirectional and bidirectional causality between the internal financial performance and external financial performance of firms. However, these results vary from case to case, depending upon the types of internal financial performance and external financial performance used in the empirical investigation process.