Research methodology:

Type of research:
This research examines the economic consequences of corporate disclosures in the emerging
economy of Egypt. The economic consequences represent the firm value and the liquidity of
its stocks. In order to measure the effect of corporate disclosures on firm value a quantitative
research was conducted as secondary data were collected from the annual reports and the
financial statements of the listed companies and the data analysis mainly depends on
statistical models such as correlation, regression and other statistical models.

Data collection and variable measurement:

Sample and data:

The sample in the current study consists of 85 firm-year observations over a five-year period
spanning from 2015 to 2019. The population from which the sample was extracted is the
Egyptian public companies listed on the Egyptian stock exchange. The sample is composed
of firms listed on the EGX 30 which includes the top 30 companies in terms of liquidity and
activity. Companies on the EGX 30 were chosen in specific due to the strict conditions
applied on the companies to be included in the index as the they must have at least 15 % free
float compatible with the listing rules. This shows that the index constituents truly represent
actively traded companies and that the index is a good and reputable barometer for the
Egyptian market. Finance and insurance companies on EGX 30 such as CI capital and CIB
were excluded due to their specific disclosure requirements and financial characteristics
Hence their annual reports may be not comparable to those of other companies (Khlif,
Samaha and Azzam, 2015) (Elfeky 2017). To conclude, the final sample consists of large
firms of the EGX 30 operating in a variety of different industries including: basic resources,
health care, automobiles, real estate, IT, media and communication services, food and
beverage, energy and support services, textiles and durables.

Regression equation:
Stock liquidity:

STLι τ =α it + β 1 VDL it + β 2 MDLit + β3 EALit + β 4 MDT it + β5 AS it + β 6 Pit + β 7 G it + ε it

Firm’s value:

FVι τ =α it + β 1 VDLit + β 2 MDLit + β3 EALit + β 4 MDT it + β5 ASit + β 6 Pit + β 7 Git + ε it

Variable measurement:
Independent variables:
a) Disclosure level:
The level of corporate disclosures for the Egyptian non-financial listed companies on
the EGX 30 is measured by the disclosure index technique (Hassan et al.,2009). The
extent of the corporate disclosures is a measure of the quantity of mandatory and
voluntary information disclosed in the companies’ annual reports (Khlif, Samaha and
Azzam, 2015). The checklist contains two indices one for the mandatory disclosure
items and the other for voluntary disclosure items. Regarding the mandatory
disclosure index, the checklist was constructed based on the checklist that was used by
Hassan et al. (2009). This list of items of information was drawn from the checklist
for the disclosure and transparency requirements of the CMA. The mandatory
disclosure index used in the study consists of 50 mandatory items of information that
the companies should disclose in their annual reports. Moving on to the construction
of the voluntary disclosure index, a checklist was constructed based on the most recent
and updated information on the Egyptian setting by Khlif, Samaha and Azzam (2015) in
their study on the effect of voluntary disclosure on the cost of equity capital in the
emerging market of Egypt. In addition to the checklist used by Elfeky (2017) in his
study measuring the determinants of the voluntary disclosure in the Egyptian market.
The newly combined checklist is divided into 14 subparts representing the categories
of voluntary disclosure resulting in a total of 153 disclosure items. These categories
are classified according to the following subparts: general information, corporate
strategy, forward looking information, corporate governance, financial performance,
shares information, risk management index, accounting policies, non-financials,
human resources, corporate social responsibility, environmental disclosure, research
and development and other voluntary disclosure items related to the financial
statements.

Each item of disclosure on both the mandatory and the voluntary disclosure indices
was given an unweighted score on a dichotomous basis (Khlif, Samaha and Azzam,
2015). Each item was given an equal weight by giving the item of information the
value of one if disclosed and the value of zero if not disclosed. Each disclosure index
(mandatory and voluntary) is measured as the sum of scores given to a specific
company in a specific year divided by the maximum number of applicable items
(Hassam et al.,2009) (Ghazali and Weetman, 2006). Content analysis was used in
order to assign disclosure scores to each company. The data was obtained from the
annual reports and the standalone financial statements published on the websites of
some companies and from the BOD report and the shareholder reports for other
companies who don’t release annual reports, this data was obtained from EGID.
 b) Disclosure time:
The previous proxy for corporate disclosure (disclosure index) is concerned with the quantity
of corporate disclosures without taking into consideration other aspects of transparency that
measures the quality of information such as timely disclosures. Timely disclosure is
measured by earnings announcement lag measured by the number of days between the fiscal
year end and the earning announcement date. The timely disclosures serve as an important
aspect of corporate transparency as it gives rise to the value and the quality of information
disclosed in the company’s annual reports (Khlif, Samaha and Azzam, 2015).

Dependent variables:

c) Firm value:

The natural logarithm of the ratio of market value of equity to the book value of equity is
used as a proxy for the firm’s value (Hassan et al., 2009) (Lemmon and Lins, 2003).
This ratio is used as it shows whether the company’s stocks is undervalued or overvalued by
dividing the market value of outstanding shares by the book value of the company’s equity. If
the market to book ratio of equity is greater than one this means that the firm is overvalued, if
it is less than one this means that the firm is undervalued.
In order to make the firm value reflect the effect of corporate disclosures, the market to book
value of equity ratio is measured in the following way. The nominator which is the market
value of equity is calculated by multiplying the number of shares outstanding by the average
share price over six months after the financial year end, in order to ensure that the accounting
information and disclosures in companies’ annual reports are reflected in the share prices.
Moving on to the denominator the book value of equity is the book value on the company’s
balance sheet at the financial year end. Moreover, a logarithm transformation is used in order
to reduce the influence of extreme values and to bring the distribution of the variables back to
normality (Hassan et al., 2009; Tsalavoutas and Dioysion,2014; Khlif, Samaha and Azzam,
2015). The study uses the market to book ratio as a measure for the firm value rather than the
market value of equity alone as according to Berk (1995) the ratio of the market equity to
book equity is a better measure of the continuously compounded expected return than is the
market value of equity alone. In addition, Fama and French (1992) that the market to book
ratio of equity is more powerful in term of significance and magnitude of the relationship
than the logarithm of the market value of equity in interpreting average returns.

The results of previous studies using the market to book value of equity as a proxy for firm
value examining the effect of disclosures on firm value has been contradicting. Hassan et al.
(2009) in her study that examines the effect of mandatory and voluntary disclosure on firm’s
value found a highly significant negative relationship between mandatory disclosure and
firm’s value measured by market to book ratio of equity. The results of this study also
showed a positive but insignificant relationship between the voluntary disclosure and the
firm’s value. Another study examining the effect of voluntary disclosure on the firm value
proxied by the market to book ratio of equity was conducted by (Uyar and Kiliç) in (2012),
the results showed a positive significant relationship between the voluntary disclosure levels
and firm value proxied by the market to book ratio of equity.

d) Stock liquidity:

According to Black (1971) the market for a certain stock is considered liquid under
the following conditions: if the investor wants to sell the stock immediately there must
always be bid and asked prices for the stock and the difference between the bid and
asked prices (the spread) is always small (Ajina, Sougne and Lakhal (2015). Therefore,
annual average effective bid-ask spread as a measure for liquidity. Due to the
information asymmetry problem, the bid-ask spread includes the issue of adverse
selection. In case of information asymmetry, the bid-ask spread increases and
consequently the liquidity decreases. The annual average effective bid-ask spread is
calculated from daily stock data. The bid and ask prices are identified from the intra-
day transaction data from investing.com. the effective bid-ask spread for any stock is
equal to the ratio of the absolute difference the trade price (ask-bid) and the mid-point
of the associated quote and the trade-price. The effective spread is then averaged over
the year to obtain the spread (Gopalan, Kadan and Pevzner, 2012). The bid-ask spread
was chosen in specific as a measure of liquidity as it is one of the most common and
frequently used measures of liquidity in the previous literature of stock liquidity as it
reflects the immediacy dimension of liquidity (Tayeh, 2010).

Effective bid-ask spread=aski,d,t bid i,d,t /aski,d,t bidi,d,t / 2

where aski,d,t and bidi,d,t are the ask price and the bid price for stock i on day d in
month t respectively.
This measure for liquidity was used by Ajina, Sougne and Lakhal (2015) to study the
effect of corporate disclosures on information asymmetry and stock market liquidity
in France on a sample of 196 French listed firms the results of this study that uses the
effective spread to measure liquidity showed that the extent of corporate disclosures in
annual reports has a positive effect on the liquidity of the French market and has a
negative effect on the adverse selection component of the bid-ask spread. On the other
hand, Ghorbani et al. (2015) used the same measure of liquidity to examine the effect of
corporate disclosures on stock liquidity and they found no significant relation between
the two variables. Therefore, the effective annual bid-ask spread is used to examine
whether there is a positive or a negative relationship between corporate disclosure and
stock liquidity in the emerging market of Egypt.

Control variables:
In the data analysis for this research, four control variables are included that have been found
in the literature to be correlated with the firm’s value (Khlif, Samaha and Azzam, 2015).
These control variables are: asset size, profitability, leverage, growth (Baek et al., 2004; Lang
et al., 2003; Silva & Alves, 2004). The first control variable expected to have an effect on the
relation of disclosure and firm value is the asset size. The asset size is measured by the
natural logarithm of the book value of assets (Hassan et al., 2009). Previous research
suggested such as (Berk, 1995) that relatively large companies in terms of asset size are
expected to have higher firm values. Another reason the asset size is used as a control
variable is that the sample has different company sizes. Moving on to the second control
variable which is the profitability, the profitability is proxied using the Return on Equity
which is calculated by dividing the net income by equity book value) (Khlif, Samaha and
Azzam, 2015). As the research is conducted in the Egyptian context, it is expected that the
profitability is positively correlated with the firm value, since investors in Egypt are not much
sophisticated as they pay more attention to profit figures (Hassan et al., 2009). Moving on to
the leverage as a control variable it is calculated by the natural logarithm of the ratio of long-
term debt to book value of equity at financial year-end. Previous research (Lins 2003)
suggests that creditors are expected to mitigate the agency problems as they act as external
monitors who play a role in reducing the managerial agency problem as they have a
beneficial governance role, therefore, a positive correlation between leverage and firm value
is expected. Moving on to the fourth control variable which is the growth measured as the
natural logarithm of the ratio of sales in the current year divided by sales in the previous year.
As for growth, the same case exists in the Egyptian context as with profitability as the
Egyptian market is dominated by individual investors focusing on the short-term return.
Consequently, growing dividends in the future is expected for higher growth companies,
therefore, a positive correlation between firm value and sales growth might be expected
(Hassan et al., 2009).