The IR papers: an academic look at the capital markets
Where more is less
Empirical studies on disclosure generally agree with finance theory predictions that more public information enhances a company’s value. However, evidence is accumulating that the association is complex and contextual. For some emerging markets, the traditional view is being turned on its head.
One example is Egypt. When UK-based researchers examined the link between mandatory financial disclosure and company value among 80 non-financial firms, they discovered a highly significant negative relationship.
‘This puzzled us at first,’ admits study co-author Gianluigi Giorgioni, senior lecturer in economics and finance at Liverpool Business School in the UK. ‘But clearly there are certain circumstances when disclosure may not have the expected impact.’
A key variable, according to Giorgioni, is the local legal environment. Although, in theory, all Egyptian listed companies are required to disclose information according to international accounting standards, in practice non-compliance is the norm. ‘And the penalties for the non-compliant companies we studied were negligible,’ Giorgioni notes. ‘The costs associated with disclosure could also outweigh its benefits.’
Aside from avoiding costs, Giorgioni suggests Egyptian investors may prefer firms to keep financial details under wraps so as not to place themselves at a competitive disadvantage. Prior studies on the Egyptian market also indicate a tendency toward secrecy in the country’s corporate culture, so investors might question the intentions of firms providing more information than is strictly necessary.
‘They may suspect managers have an ulterior motive, such as a new equity issue down the road,’ Giorgioni postulates.
But another study co-author, Omaima Hassan, currently at Brunel University in London, points out that stiffer penalties for non-compliance recently introduced by the Egyptian government might limit investor perceptions of these disclosures as an adverse signal. ‘If that is the case, there might be a great market opportunity for the development of IR,’ concludes Hassan.