The extent of financial disclosure and its determinants in an emerging capital market: the case of Egypt

TLDR: In this article, the extent and determinants of disclosure levels of non-financial companies quoted on the Egyptian stock exchange were investigated using panel data analysis, which showed gradual increases in disclosure levels, with a high compliance for mandatory disclosure, although the voluntary disclosure level was rather limited.

Abstract: This paper uses panel data analysis to investigate the extent and determinants of disclosure levels of non-financial companies quoted on the Egyptian Stock Exchange. It distinguishes between private sector companies and public business sector companies in terms of company characteristics and disclosure practice. Results show gradual increases in disclosure levels, with a high compliance for mandatory disclosure, although the voluntary disclosure level was rather limited. Public business sector companies appear generally to disclose less information than private sector companies. Furthermore, more profitable companies disclose more information than less profitable ones. Results for firm size, gearing and stock activity are mixed.

Figures

Table 2 Spearman’s correlation coefficients MINDEX: mandatory disclosure level; VINDEX: voluntary disclosure level.

Table 3 T-test for equality of means

Table 4 Multiple regression models Dependent variables: voluntary and mandatory disclosure indices Sample size: 77 companies for the period 1995- 2002 Firm size: natural logarithm of the book value of total assets; legal form: a dummy variable taking the value of one if the company is a public sector company and the value of zero otherwise; profitability: net income/book value of equity; gearing: total debt/ total assets; stock activity: share’s trading days for six months after the financial year-end divided by total trading days; d1997: a dummy variable for year 1997. The number of observations decreases after eliminating outliers, defined as those observations with large standardized residuals (equal to or more than 3), or observations whose leverage values give them large influence. These outliers have been identified for each model individually; hence the number of observations in each model after dropping the outliers is different.

Table 1 Descriptive analysis – common samples Gearing: total debt/ total assets; profitability: net income/book value of equity; stock activity: share trading days for six months after the financial year-end divided by total trading days.

Full text

HASSAN, O.A.G., GIORGIONI, G. and ROMILLY, P. 2006. The extent of financial disclosure and its determinants in an
emerging capital market: the case of Egypt. International journal of accounting, auditing and performance evaluation
[online], 3(1), pages 41-67. Available from: https://doi.org/10.1504/ijaape.2006.010102
The extent of financial disclosure and its
determinants in an emerging capital market: the
case of Egypt.
HASSAN, O.A.G., GIORGIONI, G. and ROMILLY, P.
2006
This document was downloaded from
https://openair.rgu.ac.uk

The extent of accounting disclosure and its determinants in an emerging
capital market: the case of Egypt
Omaima Hassan, Gianluigi Giorgioni
and Peter Romilly
Third draft: March 2005
Abstract: This paper uses panel data to investigate the extent and determinants of
disclosure levels of non-financial companies quoted on the Egyptian Stock Exchange.
Results show gradual increases in disclosure levels, with a high compliance for
mandatory disclosure, although the voluntary disclosure level was rather limited.
Public sector companies appear generally to disclose less information than private
sector companies in terms of the layout of the balance sheet, cash flow statement,
notes to accounts, policies adopted in preparing the financial statements, and general
information. Furthermore, more profitable companies disclose more information than
less profitable ones. Results for firm size, gearing and stock activity are mixed.
Key words: Mandatory disclosure; voluntary disclosure; Egypt; emerging market;
panel data.
Address for correspondence
Omaima A. G. Hassan
Division of Accounting & Law
Dundee Business School
University of Abertay Dundee

2
Old College, Bell Street
Dundee DD1 1HG
United Kingdom
Tel. 0044-1382-308138
Fax. 0044-1382-308400
E-mail: 0016338@abertay.ac.uk
dbtoh@abertay.ac.uk
------------------------------------------------------------
Dr. Gianluigi Giorgioni, Senior Lecturer in Economics and Finance, School of
Accounting, Finance and Economics, Liverpool John Moores University.
G.Giorgioni@ljmu.ac.uk
Dr. Gianluigi Giorgioni is a Senior Lecturer in Economics and Finance at
Liverpool John Moores University after having spent six years as a Lecturer in
Economics at the University of Abertay Dundee. Dr. Giorgioni received the
Laurea from Bologna University and his M.Sc. and Ph.D. from Liverpool John
Moores University. He has published articles in journals such as Applied
Economics, Applied Economic Letters, Economic Modelling, International
Review of Applied Economics and the Journal of Chinese Economic and
Business Studies. His research interests are in the areas of finance,
international finance, applied macroeconomics and development economics.
Dr. Peter Romilly, Reader in Economics, Dundee Business School, University of
Abertay Dundee.

3
1 Introduction
This paper investigates accounting disclosure practice and its determinants for a
sample of Egyptian non-financial companies listed in the Egyptian Stock Exchange
(ESE) over the period 1995-2002. It contributes to the disclosure literature by using a
panel data set. Panel data sets possess a number of advantages over traditional cross-
sectional or time series data sets. They usually give the researcher a large number of
observations, increasing the degrees of freedom and reducing the collinearity problem
among explanatory variables, hence improving the efficiency of econometric
estimates. Moreover, the use of panel data provides a means of resolving or reducing
the magnitude of the problem of omitted variables that are correlated with explanatory
variables [1]. Furthermore, this paper distinguishes between disclosure practice for
public business sector companies and private sector companies, and for heavily traded
and less traded companies. These two characteristics are country related
characteristics and hence improve our understanding of disclosure practice in Egypt.
Although the ESE is one of the oldest stock exchanges in the world, there appears to
be virtually no comprehensive empirical international published study that covers
disclosure practice in the Egyptian context, with the exception of the Abd-Elsalam
and Weetman (henceforth AW) study in 2003 [2]. The purpose of the AW study was
to investigate issues related to familiarity and language accessibility of the
International Accounting Standards (IAS) disclosures when they were first introduced
in the Egyptian capital market, while the purpose of this study is to investigate the
extent of disclosure and its determinants for a sample of Egyptian listed companies.
The AW disclosure index covers mandatory disclosures, while this research
constructs two indexes covering both types of disclosure: mandatory and voluntary

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disclosures. The research sample in the AW study consists of 72 non-financial listed
companies for the financial year 1995, while the sample in this study includes 77
companies spanning the period 1995 to 2002, thus enabling a panel data analysis.
The importance of this study arises from the benefits it provides to individual
investors and regulators. The disclosure practices of the Egyptian listed non-financial
companies may benefit individual investors when planning their investment choices in
Egypt. Identifying variables affecting disclosure levels and shedding light upon the
difference between public business sector companies and private sector companies
regarding disclosure practice might help regulators in specifying ways to enhance
disclosure and transparency in the ESE. Moreover, this study may help as a guide in
studying other markets in the area, which may contribute to the accounting literature
on emerging capital markets.
The rest of this paper is organised as follows. Section 2 provides a background to the
ESE. The disclosure index and its creation are explained in section 3. Section 4
develops the research hypotheses. A description of the data, together with data
analysis and results, are provided in section 5. Finally, section 6 summarizes the main
conclusions.

Frequently asked questions

Q1. What contributions have the authors mentioned in the paper "The extent of financial disclosure and its determinants in an emerging capital market: the case of egypt" ?

This paper uses panel data to investigate the extent and determinants of disclosure levels of non-financial companies quoted on the Egyptian Stock Exchange. Furthermore, more profitable companies disclose more information than less profitable ones. 

Q2. What future works have the authors mentioned in the paper "The extent of financial disclosure and its determinants in an emerging capital market: the case of egypt" ?

Future research could investigate the impact of new regulations upon the level of compliance with mandatory disclosure, as compliance costs will increase. Also future research might investigate the impact of other potential explanatory variables such as ownership structure and board composition, which are proxies for corporate governance, upon the level of disclosure. 3. 14 Total assets can be derived. Disclosure information in annual reports can be divided into two broad categories, mandatory and voluntary. 

Q3. What is the reason why the higher the gearing ratio, the higher the agency costs?

It is argued that the higher the gearing ratio, the higher the agency costs because larger gearing ratios allow for greater potential transfer of wealth from creditors to shareholders [14, 249]. 

Q4. What was the effect of the transformation on the distribution of the variables?

As almost all the variables are skewed, a logarithm transformation of the variables was23undertaken to bring the distributions of these variables closer to normality [24]. 

Q5. What is the potential limitation of disclosure indices?

A potential limitation of studies using disclosure indices to investigate disclosure levels is that the results are only valid to the extent of the disclosure index used and time period investigated. 

Q6. What is the main argument that the larger the company, the larger the informational gap between investors?

it is argued that the larger the company (in terms of number of shareholders), the larger the informational gap (information asymmetry) among investors on one hand and between investors and the management on the other hand, so more disclosure might be used to reduce the information asymmetry problem. 

Q7. How can the authors expect more from a company?

Assuming that listed companies are aware of investors’ interest, the authors can expect that more profitable companies will disclose more to increase investors’ confidence. 

Q8. What rights do bondholders have to inspect the financial statements?

Bondholders’ associations have the right to inspect the financial statements and to send a representative to the annual general meeting. 

Q9. What is the argument that firm size is a comprehensive variable?

It is argued that firm size is a comprehensive variable that could proxy for competitive advantages, information production costs and political costs [3, 43].