Int J Accounting, Auditing and Performance Evaluation, Vol 7, Nos 1/2, 2011 An empirical analysis of corporate governance structures and voluntary corporate disclosure in volatile capital markets: the Egyptian experience Khaled Samaha* Department of Accounting, School of Business, The American University in Cairo (AUC), Room 2058 – BEC Building, P.O Box 74, New Cairo 11825, Egypt E-mail: ksamaha@aucegypt.edu *Corresponding author Khaled Dahawy Department of Accounting, School of Business, The American University in Cairo (AUC), Room 2001 – BEC Building, P.O Box 74, New Cairo 11825, Egypt E-mail: dahawy@aucegypt.edu Abstract: This paper examines the level and determinants (i.e ownership structure, board composition and audit committee presence) of voluntary corporate disclosure in the annual reports of the largest 100 companies listed on the Egyptian stock exchange (EGX) Our results indicate that overall voluntary disclosure was low at just 13.43% with a large variation range This score places Egypt at a lower level than other emerging capital markets (e.g Singapore, Hong Kong and Malaysia) The variances of these results support the need for individual country level studies and comparative analysis Multivariate results show audit committee presence as the most significant variable influencing voluntary disclosure Also, companies with a higher ratio of independent non-executive directors have a higher extent of voluntary disclosure It was also evidenced that voluntary disclosure increases with decreases in block-holder ownership Results show that two other ownership aspects – managerial and government – are not related to voluntary disclosure Finally, the analysis shows profitability and internationality significantly impact voluntary disclosure On the other side, that number of shareholders, type of auditor, size, liquidity, leverage and industry type of the firm not affect the extent of voluntary disclosure Keywords: corporate governance; corporate disclosure; voluntary disclosure; volatile capital markets; Egypt Reference to this paper should be made as follows: Samaha, K and Dahawy, K (2011) ‘An empirical analysis of corporate governance structures and voluntary corporate disclosure in volatile capital markets: the Egyptian Copyright © 2011 Inderscience Enterprises Ltd 61 62 K Samaha and K Dahawy experience’, Int J Accounting, Auditing and Performance Evaluation, Vol 7, Nos 1/2, pp.61–93 Biographical notes: Khaled Samaha is an Assistant Professor in the Department of Accounting at the American University in Cairo (AUC) He has a PhD (Manchester Business School – UK) and an MSc (Birmingham Business School – UK) He is a Certified Public Accountant (CPA) from the Egyptian Society for Accountants and Auditors (ESAA) and is certified by the Egyptian Accounting Syndicate He has extensive practical experience in the application of International Financial Reporting Standards (IFRSs) and he has recently published three papers about progressing Egypt towards convergence with IAS/IFRS His research interests include harmonisation and compliance with IAS/IFRS, financial reporting and corporate governance mechanisms, audit procedures and methodologies, financial reporting on the internet and the implementation of accounting information systems in small and medium size enterprises (SMEs) Currently, he is serving as a Member on the Editorial Board of the Afro Asian Journal of Finance and Accounting Currently, he is serving as an Audit Consultant on various projects with the Egyptian Ministry of Transport and the government of the Italian Republic Khaled Dahawy is the Director of MBA programs and an Associate Professor in the Department of Accounting at the American University in Cairo (AUC) He has a PhD (University of North Texas) and an MBA (Pennsylvania State University) He is a Certified Public Accountant (CPA) in the State of Illinois, USA, certified from the Egyptian Society for Accountants and Auditors (ESAA) and is certified by the Egyptian Accounting Syndicate He has several papers and cases published in academic accounting journals and presented at academic and practitioner conferences His research interests include corporate governance disclosure, disclosure in the developing countries, the role of the audit profession in strengthening transparency and disclosure, the use of information technology in accounting and the implementation of computerised accounting information systems He teaches financial accounting, international accounting, tax accounting and auditing He has extensive practical experience as an expert in the Capital Market Authority (CMA) and has served as a Consultant in many missions with the World Bank and the National Democratic Party (NDP) Introduction The move towards a free market economy characterised by free trade and working of a market pricing mechanism in the 1990s represented challenges to the Egyptian government, private sector institutions and the accounting profession This was the case because historically Egyptian accounting was not capital-market oriented but followed the principles of macro accounting, with strong government intervention to control the economy and was closely connected with tax accounting (Hegazy, 1991) As a result, the Egyptian government has adopted several far-reaching measures aimed at improving the local and foreign investment environments in order to cope with the recent changes that Egypt witnessed These measures include the introduction of the International Accounting Standards (IASs) This was parallel with a programme to privatise stateowned companies as part of a more comprehensive movement towards capitalism, as well as promotion of economic democracy and widespread of stock ownership The Egyptian experience 63 That change in orientation meant that the country had to change its whole environment including the political, economic, social and legal environments to accommodate private enterprises (Tesche and Tohamy, 1994) Thus, this was followed by the Egyptianisation of these standards in 1997, originating the so-called Egyptian accounting standards that became mandatory starting from 1998 The Egyptian Society of Accountants and Auditors (ESAA) translated the IASs, organised many conferences which argued for the introduction of the standards and helped in the regulation of accounting in Egypt These accounting changes were coupled with devaluation of the currency, revision of the tax and customs structure and rates and revision of the investment law The adoption of IASs benefited Egypt in several aspects it facilitated Egyptian access to international capital markets it saved time and effort that might have been spent developing the national accounting standards from scratch ensured the fairness and meaningfulness of financial statements prepared by Egyptian enterprises for international investors increased the importance of accounting as a profession, due to the introduction of the professional code and objectives Hofstede (1984) cultural variables model shows Egypt as a collectivist society, with large power distance and strong uncertainty avoidance According to Gray’s (1988) model linking Hofstede’s cultural variables with accounting variables, Egyptian accounting should be characterised by statutory control, uniformity, conservatism and secrecy HassabElnaby and Mosebach (2005) argued that these accounting variables are in conflict with the capitalistic model that IASs is based on In other terms, the Egyptian cultural variables may conflict with the application of IASs (Dahawy and Conover, 2007) This argument is confirmed by the findings of Samaha and Stapleton (2008) which focused on the practice (de facto) compliance with IASs in Egypt and revealed that there is evidence of very low levels of compliance To the extent that this evidence is indicative of poor transparency, and/or the use of creative accounting techniques, it is problematic for investors Overall, these results may be seen to confirm the view taken by the World Bank report (World Bank, 2002) that Egyptian financial reporting lacks reliability Egypt’s case presents a classical confrontation between a historically secretive society and the requirement for high disclosure levels to attract direct foreign investments Researchers have, historically, found Egypt’s business society to be highly secretive (Dahawy et al., 2002) However, the Egyptian government, business world and media have consistently reported the need for direct foreign investment and hence the increase in disclosure levels This has resulted in increased significance of the Egyptian Stock Exchange (EGX) (Samaha and Stapleton, 2008) as an important venue for attracting foreign investments and to encourage local residents to invest in shares Therefore, Egyptian companies may engage in voluntary disclosure1 to enhance the value of their stocks This confrontation highlighted above between secretive culture and need for disclosure presents an interesting motivation to investigate whether the traditional high secrecy level outweighed the reforming efforts of government to establish a climate of greater accountability and transparency 64 K Samaha and K Dahawy Furthermore, understanding why firms disclose information voluntarily is useful to both preparers and users of accounting information, as well as to accounting policy makers (Buzby, 1975; Meek et al., 1995) Previous studies on the determinants of voluntary disclosure have focused mainly on the USA and other developed countries (e.g Buzby, 1975; Camfferman, 1997; Cerf, 1961; Choi, 1973; Cooke, 1989; Depoers, 2000; Ferguson et al., 2002; Firth, 1979; Frost and Pownall, 1994; Gray et al., 1995; Inchausti, 1997; Malone et al., 1993; Meek and Gray, 1989; Meek et al., 1995; Mitchell et al., 1995; Raffournier, 1995; Turpin and DeZoort, 1998) In contrast, a limited number of research studies examined disclosure practices of companies in the developing economies (Needles, 1997).2 Some studies have examined institutional mechanisms (i.e corporate governance) that may influence voluntary disclosure practice Corporate governance attributes examined in relation to voluntary disclosure in these studies include ownership structure, the proportion or existence of independent directors, the appointment of a non-executive director as chairman and the existence of an audit committee However, most of the previous research in the developing countries focused on the effect of a single corporate governance attribute (see e.g Chau and Gray, 2002) and very few examining different governance attributes in a single study (see e.g Ghazali and Weetman, 2006) It is worth noting that Okeahalam and Akinboade (2003) reviewed the corporate governance literature in the African context, and concluded that: “there has been limited published research on corporate governance in Africa and even less rigorous academic or empirical research There is an urgent need to embark on a meaningful analysis of corporate governance [research] in Africa” (p.28) Therefore, an additional motivation of this paper is to fill a void of research that explains the impact of corporate governance on voluntary disclosure in Egypt as an African nation In light of the above, our main research questions are: What is the level of voluntary disclosure in the annual reports of listed Egyptian companies? To what extent are aspects of corporate governance statistically significant in explaining the level of voluntary disclosure in the annual reports of listed Egyptian companies? Therefore, this paper has three aims Firstly, to examine voluntary disclosure of companies listed on the EGX Secondly, to examine whether corporate governance variables that were found to be significant in explaining voluntary disclosure practices in developed nations would have the same significance in developing nations Finally, to compare the results with other research conducted in other developing nations This study adds to the literature on voluntary disclosure in the developing countries and extends that literature by including corporate governance variables as possible explanatory variables of voluntary disclosure Also, the results of this research may be useful for regulators in Egypt as they continue to deliberate the appropriate corporate governance requirements This study should also help investors who are interested in investing in Egypt in understanding the Egyptian corporate governance and disclosure environment This study extends academic research by comparing findings with results from other studies on developing nations If the results are the same then we can address developing nations as a group If the results of this study are different it will give support for the need to research at the individual country level The Egyptian experience 65 An overview of the Egyptian economy and the Egyptian corporate governance framework is provided in Section Section provides a literature review and develops and formulates the research hypotheses Data selection and collection, and the research techniques, are described in Section Results and analysis are presented in Section 5, with conclusions in Section Overview of the Egyptian economy and corporate governance framework Over the past several years, Egypt has actively reviewed and improved its regulatory frameworks, in particular, corporate governance, transparency and disclosure However, the mandatory adoption of International Accounting Standards/International Financial Reporting Standards (IAS/IFRS) starting from 1997 is not sufficient to resolve the transparency problem or grantee the quality of disclosure (Samaha and Stapleton, 2008) Mandatory disclosure rules ensure equal access to basic information (Lev, 1992), but this information has to be augmented by firms’ voluntary disclosures and information production (Cheng and Courtenay, 2004) There are major market incentives to disclose information voluntarily Managers’ attitudes to voluntary disclosure change according to the perceived relationship of costs and benefits involved (e.g see Gray et al., 1990; Healy and Palepu, 1995) The Egyptian government reform measures have dramatically improved the outlook for Egyptian foreign investments, instigated and sustained high levels of growth and employment creation The current increase of the number of newly established companies and the expansions undertaken by companies already in operation, are the results of the streamlining investment procedures that have been undertaken Inflows of foreign direct investment (FDI) have also significantly increased, particularly starting in the financial year 2003/2004.3 Net FDI inflows increased from US$509.4 million in FY 2000/2001, to reach US$6.1 billion in FY 2005/2006 and US$11.1 billion in FY 2006/2007 According to the World Investment Report, published in 2007 by the United Nations Conference on Trade and Development (UNCTAD), Egypt has emerged as the lead FDI recipient country in the African continent On the monetary side, net international reserves reached US$31.7 billion in December 2007, achieving an increase nearly by 21.9% compared with December 2006 In addition, the inflation rate has dropped from 12.4% in 2006 to 6.9% in 2007 The primary capital market reports that the total value of share issuances has increased from 83.62 billion Egyptian pounds to 102.93 billion Egyptian pounds which is an increase of 23% in one year On the secondary market the general index of the stock market in points has increased from 2,500 to 3,500 during 2007 (www.investment.gov.eg) The Egyptian Ministry of investment through the Egyptian Institute of Directors (EIOD)4 introduced the general framework of corporate governance via an Egyptian Corporate Governance Code (ECGC) in 2005 The code is based on the Organisation for Economic Cooperation and Development (OECD) corporate governance principles The intention was to enhance the quality of information issued by listed companies, improve decision making, attract investors and stimulate economic development through increased competition and enhance the level of confidence of foreign portfolio investors in the Egyptian capital market (Carana, 2000; MOFT, 2007) 66 K Samaha and K Dahawy This code represents the general framework for corporate governance of Egyptian enterprises The corporate governance code was published in Arabic, setting out principles of best practice for good corporate governance Compliance with the EIOD code is not mandatory The guide is prepared in accordance with the corporate governance principles issued by the OECD and a number of countries including South Africa, Malaysia and the Philippines These rules are primarily applicable to joint stock companies listed on the stock market, especially those being actively traded As stated in guideline (3–4), the board should comprise a majority of non-executive directors with the technical or analytical skills to benefit the board and the company All of the non-executive directors should dedicate the time and attention necessary to fulfil their obligations to the company and not to accept assignments that could be seen to be a conflict of interest In addition, guideline (6–1) stated that the audit committee should consist of not less than three non-executive members One member should be a financial and accounting expert In case of an insufficient number of non-executives, one or more members may be appointed from outside the company A critical aspect of the new EGX listing rules is that companies must form an audit committee of the board The audit committee is responsible for the oversight of internal auditing and control procedures and reviews annual reports and prospectuses The audit committee does not propose the external auditor The members of the committee should be non-executives, unless there are no non-executive directors on the board, in which case outsiders can be hired (EGX, 2006) Since 2005, the activities of the EGX have indeed increased considerably: market capitalisation has increased dramatically reaching 46% by the end of 2006 (EGX, 2006); there were 1.65 million investors in 2005, compared with only 25,000 ten years earlier (EGX, 2006); and the number of registered companies increased from 218 in 1991 to 1,150 by the end of 2002 (CMA, 2003) and down to 800 companies by the end of 2006 (EGX, 2006) The EGX has raised its international profile and is one of the leading markets in the Middle East North Africa region Foreign participants, who enjoy full market access and suffer no restrictions on capital mobility or convertibility, represented approximately 17% of value traded in 2001 (Abdel Shahid, 2003) and reaching 31% by end 2006 (CMA, 2006) This level of growth and the increase in international profile suggest that the government’s reform process has met with some success, and it has been argued that the Egyptian Exchange is prepared for the globalisation era (Omran, 2002; Samaha and Stapleton, 2008) However, as it was seen in the Far East financial crisis in countries such as Thailand such rapid growth is not necessarily accompanied by increases in the quality of corporate reporting Since best practices in corporate governance and greater disclosure are just being promoted, there is probably a cross-sectional variance in corporate governance Hence, Egyptian firms provide an appropriate sample to examine the issue of corporate governance and disclosure at this time We ask whether the subsequent actions of reform by the Egyptian government increased the awareness of disclosure as a tool of corporate governance Examining company annual reports after the introduction of new corporate governance recommendations in 2005 by the EIOD also gives us the opportunity to assess transparency by companies that adopted the best practices recommended in the Egyptian Code of Corporate Governance (ECCG) The Egyptian experience 67 In Section 3, we review literature which suggests association between voluntary disclosure and corporate governance based on theories of reporting, including mainly agency and political costs theories We then consider the empirical evidence and draw out six hypotheses for testing on Egyptian companies Prior literature and development of hypotheses Corporate governance is aptly defined by Denis and McConnell (2002, pp.1–2) as “…the set of mechanisms – both institutional and market-based – that induce the self-interested controllers of a company … to make decisions that maximise the value of the company to its owners…” Recent empirical work on the association between disclosure and corporate governance in the developing countries include Ghazali and Weetman (2006), Barako et al (2006), Cheng and Courtenay (2004), Chau and Gray (2002), Eng and Mak (2003), Haniffa and Cooke (2002) and Ho and Wong (2001) We extend prior work by examining corporate governance from three aspects Specifically, this paper examines the association between the various categories of ownership structure, board composition, existence of audit committees and voluntary disclosure 3.1 Ownership structure Structure of ownership determines the level of monitoring and thereby the level of disclosure As in previous research, we introduce ownership structure by including number of shareholders block-holder ownership: the proportion of ordinary shares held by substantial shareholders which is represented by shareholdings of 5% or more managerial ownership: the proportion of ordinary shares held by the CEO and executive directors government ownership The number of shareholders is used as a measure of dispersion of shareholder control Schipper (1981) proposed that monitoring problems that could be solved by issuing public accounting reports would increase with the number of owners As the number of shareholders increases, one would expect disclosure to increase if it can provide a solution to the additional monitoring problems associated with dispersion in ownership Previous studies have found a significant positive association between the number of shareholders and the extent of financial disclosure (e.g Chau and Gray, 2002; Cooke, 1989, 1991; Malone et al., 1993) Block-holder ownership is the percentage of ordinary shares held by substantial shareholders (i.e shareholdings of 5% or more) Additional monitoring is required in cases when share ownership is diffused Hence, it is expected that voluntary disclosure increases with decreases in block-holder ownership Previous research has indicated the presence of a negative relation between block-holder ownership and disclosure (McKinnon and Dalimunthe, 1993; Mitchell et al., 1995; Schadewitz and Blevins, 1998) 68 K Samaha and K Dahawy Managerial ownership is the percentage of ordinary shares held by the CEO and executive directors Excessive management ownership could be counter-productive to the firm’s long-term value, as management could effectively wield external threats This contention is found in the entrenchment theory (Fan and Wong, 2002; Morck et al., 1988) which predicts that high management interest leads to lower voluntary disclosure Further, the controlling owner of the firm effectively decides “… the accounting reporting policies” (Fan and Wong, 2002, p.403) It is predicted that this leads to a low level of disclosure, driven primarily by the controlling owner’s motive to hold up minority shareholders (Fan and Wong, 2002) In line with this, prior research (e.g Eng and Mak, 2003; Ghazali and Weetman, 2006) argues that greater agency problems exist when managerial ownership is low In other terms, executives who own a smaller portion of the company would have high incentives to consume bonuses and low incentives to maximise job performance In this instance, outside shareholders may need to increase monitoring of a manager’s behaviour to reduce the associated increase in agency costs The required monitoring by outside shareholders will increase firm costs However, these costs can be reduced if managers provide voluntary disclosure In this context, voluntary disclosures can act as a substitute for costly monitoring Previous studies show managerial ownership to be negatively related to disclosure levels (e.g Eng and Mak, 2003; Ghazali and Weetman, 2006; Ruland et al., 1990) Based on the previous arguments and findings, we expect that voluntary disclosure increases with decreases in managerial ownership There has been no agreement on the impact of governmental ownership on disclosure Eng and Mak (2003) argue that agency costs are higher in government-owned companies because of conflicting objectives between pure profit goals of a commercial enterprise and goals related to the interests of the nation, resulting in a need for communication with other shareholders in the form of disclosures However, Ghazali and Weetman (2006) argued that companies with government ownership may not need to give extensive disclosure because of the presence of additional separate monitoring by the government In addition, government-controlled companies can obtain cheaper funds from local banks; therefore, they may not need to attract potential investors As a result, less disclosure can be expected in government-controlled companies It may be expected in a developing country like Egypt that government-controlled companies are strongly politically connected and these companies may disclose less information to protect their political linkages or interests or beneficial owner Therefore, we expect that companies with a higher proportion of government ownership will disclose less voluntary information Based on the previous discussion, we introduce the following hypothesis: H1: There is a positive association between the number of shareholders and the level of voluntary disclosure H2: There is a negative association between block-holder ownership and the level of voluntary disclosure H3: There is a negative association between managerial ownership and the level of voluntary disclosure H4: There is a negative association between government ownership and the level of voluntary disclosure The Egyptian experience 69 3.2 Board composition: independent non-executive directors on the board Healy and Palepu (2001) argue that the agency problem can be solved by having the board of directors monitor and discipline management on behalf of the external owners The board of directors provides monitoring as it is elected by the shareholders to monitor their interests The board of directors is the central internal control mechanism for monitoring managers Non-executive directors can be regarded as “professional referees whose task is to stimulate and oversee the competition among the firm’s top management” (Fama, 1980, p.294) The perceived importance of the outside directors as a powerful tool for constraining management behaviour is largely attributed to their being independent of management (Rosenstein and Wyatt, 1990) The presence of a higher proportion of non-executive directors on corporate boards should result in more effective monitoring of managerial opportunism (Chau and Leung, 2006; Fama and Jensen, 1983; Leftwich et al., 1981; Weir and Laing, 2003) Thus, the firms whose boards are dominated by outside directors and they are expected to disclose more voluntary information Previous studies report that companies that have more outside directors on the board have more voluntary disclosures (e.g Adams and Hossain, 1998; Chen and Jaggi, 2000; Cheng and Courtenay, 2004; Leung and Horwitz, 2004; Williams, 2002) However, some researchers, did not find significant relationship between the level of voluntary disclosure and board independence (Ghazali and Weetman, 2006; Haniffa and Cooke, 2002; Ho and Wong, 2001) Other researchers report the presence significant negative association between the level of voluntary disclosure and board independence (Barako et al., 2006; Eng and Mak, 2003; Gul and Leung, 2004) In terms of board composition, duality and board of director’s size can be seen as important factors that impact disclosure However, the information related to duality is non-existent in the Egyptian environment and cannot be collected Given the Egyptian environment the board size may not be an indicator of monitoring and disclosure Appointment of independent non-executive directors is a new governance initiative recommended in ECCG Currently, there is no empirical research that has linked board independence to voluntary disclosure in Egypt The ECCG guidelines specifically define an independent director as a person who is not involved in the management of the company and does not have any direct or indirect interest in the company Our expectation is that with the introduction of the ECCG, independent directors will play a more proactive role in ensuring greater corporate transparency and accountability This increased awareness may be partly discharged by more voluntary information disclosure in annual reports The expectation is expressed in the following hypothesis: H5: There is a positive association between the proportion of independent non-executive directors and the level of voluntary disclosure 3.3 Existence of an audit committee Audit committees, among other functions, ensure the quality of financial accounting and control system (Collier, 1993) Since an audit committee consists mainly of nonexecutive directors, it should reduce the amount of withheld information Agency theory predicts that audit committees should lower agency costs Bradbury (1990) views audit committees as a monitoring mechanism which is formed voluntarily in high agency cost 70 K Samaha and K Dahawy situations to improve the quality of information flow between principal and agents Audit committees may improve internal control and thus act as an effective monitoring device for improving disclosure quality Forker (1992) found a positive but weak relationship between the disclosure of the audit committee and the quality of share option disclosure for UK companies McMullen (1996) found significant association between the presence of audit committees and more reliable financial reporting Barako et al (2006) also found strong positive relationship between the presence of an audit committee companies’ voluntary disclosure practices in Kenya Both ECCG and listing rules in Egypt require the presence of an audit committee, to enhance the level of information produced by companies The quality and meetings of the audit committee can be seen as factors that impact the monitoring role of the audit committee However, given the secretive Egyptian culture and the novice status of the audit committee requirements, it is impractical, if not impossible, to have the access to this type of detailed information Since this is a new requirement Therefore, it is hypothesized that: H6: There is a positive association between the existence of audit committees and the level of voluntary disclosure 3.4 Other control variables Following the practice in prior research5 we include size, financial leverage, industry type, type of auditor, profitability, liquidity and internationality as control variables in the multiple regression models for testing the main hypotheses Data collection and research design 4.1 Sample selection and data sources Despite the increased market capitalisation of the Egyptian Stock Market, trades remain concentrated in few companies that exhibit real strong fundamentals (EGX, 2006) In 2006, the EGX had 800 listed companies of which 30 are the most actively traded companies as measured by the EGX 30 index The information on the market capitalisation of all 800 listed companies is found in the EGX Bulletin that is published monthly Therefore, we based our sample selection on the largest 100 firms according to market capitalisation for the year 2006 This approach is used due to data limitations Voluntary disclosure is measured by the amount and detail of non-mandatory information that is contained in the management discussion and analysis in the annual report In Egypt, there is no Data Stream from which the annual reports could be obtained However, all the annual reports in addition to board of director’s reports of listed companies are filed with the Egyptian Company for Information Dissemination (EGID) which follows the EGX, and are available for a fee The annual reports and the Board of Directors reports of the sample companies for the year ending 2006 were obtained from EGID There is no information in the annual reports of listed Egyptian companies about the number of shareholders, block-holder ownership, managerial ownership, government ownership, proportion of non-executive independent directors and the existence of audit The Egyptian experience Table 79 Results of cross-sectional OLS regressions Overall voluntary disclosure model Financial informationmodel Strategic information model Corporate social responsibility model 40.8 34.6 50.4 53.1 Adjusted R2 F statistic 18.059 18.451 26.155 38.360 Significance 0.000*** 0.000*** 0.000*** 0.000*** Durbin Watson test 1.514 1.752 1.633 1.604 Variables Constant t Sig (p-value) 1.987 Beta 0.050 0.230EX t Sig (p-value) 3.415 Beta 0.001 0.666 0.507EX t Sig (p-value) 0.254 Beta t Sig (p-value) 0.800 2.046 0.043 0.158 2.748 0.007*IN 0.120 1.465 0.146EX Beta Ownership diffusion SHARE 0.107 1.208 BLKOWN 0.211 2.407 0.018*IN 0.057 0.162 0.1886 0.062EX 0.118 1.464 0.146EX 0.188 2.625 0.010**IN MANOWN 0.080 1.016 0.312EX 0.023 0.282 0.779EX 0.066 0.920 0.360EX 0.078 1.136 0259EX GOVOWN 0.075 0.941 0.349EX 0.099 1.209 0.230EX 0.002 0.023 0.982EX 0.012 0.171 0.864EX 2.395 0.019*IN 0.168 1.816 0.073EX 0.175 2.166 0.033*IN 0.225 3.384 0.001***IN 3.843 0.000***IN 1.119 5.951 0.000***IN 0.932 5.481 0.000***IN 0.869 5.850 0.000***IN 0.519 0.605EX 0.143 1.724 0.088EX 0.044 0.618 0.136 Board composition INDEP 0.234 Existence of audit committees ACOM 0.812 Control variables AUDIT 0.041 0.538EX 0.009 0.892EX IT1 0.027 0.347 0.729EX 0.080 0.955 0.342EX 0.319 2.640 0.010**IN 0.038 0.536 0.593EX IT2 0.001 0.014 0.989EX 0.080 0.963 0.338EX 0.042 0.532 0.596EX 0.921 0.359EX 0.722EX 0.064 IT3 0.028 0.357 0.027 0.322 0.748EX 0.058 0.532 0.596EX 0.086 1.243 0.217EX INTER 0.148 1.988 0.049*IN 0.435 2.336 0.022*IN 0.086 1.189 0.237EX 0.118 1.716 0.089EX LEVG 0.064 0.814 0.418EX 0.051 0.602 0.549EX 0.027 0.367 0.714EX 0.040 0.563 0.575EX ASSETS 0.074 0.923 0.358EX 0.135 1.651 0.102EX 0.074 0.996 0.322EX 0.006 0.086 0.931EX SALES 0.010 0.117 0.907EX 0.058 0.617 0.538EX 0.047 0.623 0.535EX 0.003 0.035 0.972EX PROF 0.160 2.087 0.040*IN 0.198 2.482 0.015*IN 0.097 1.348 0.181EX 0.028 0.403 0.688EX LIQD 0.097 1.209 0.071 0.859 0.393EX 0.057EX 0.007 0.094 0.926EX 0.230EX 0.138 1.926 *Significant at the 0.05 level **Significant at the 0.01 level ***Significant at the 0.001 level Note: IN = variables included by the stepwise regression; EX = variables excluded by the stepwise regression The existence of audit committees is the most important predictor of the extent of overall voluntary disclosure, with the highest estimated coefficient of 3.843 significant at less than the 0.0001 level and in the predicted direction The positive sign for the existence of audit committees provides support for Hypothesis H6 in that companies with an audit committee disclose more voluntary information in their annual reports This is consistent with Ho and Wong (2001) and Barako et al (2006) who found the existence of audit committees to be positively significant Furthermore, the existence of audit committees is 80 K Samaha and K Dahawy significant at the 0.0001 level in explaining all types of voluntary information disclosure (FIN, STRAT and CSR) and in the predicted direction Hence, it may be appropriate for regulatory authorities (e.g EGX) to require all listed companies in Egypt to establish an audit committee in order to secure more corporate transparency Next the most significant variables are block-holder ownership and the ratio of independent directors on the board (with a p-value 0.018 and 0.019, respectively) Both are in the predicted direction The negative sign for the block-holder ownership provides support for H2 in that voluntary disclosure increases with decreases in block-holder ownership This is inconsistent with Eng and Mak (2003) who found that the level of voluntary disclosure is not significantly related with block-holder ownership However, block-holder ownership is significant at the 5% level in explaining one type of information disclosure (START) and in the predicted direction Information disclosure is likely to be high in companies with a lower proportion of block-holder ownership This is consistent with Gray’s (1988) secrecy hypothesis which argues that where a firm’s shares are closely held, there is a preference for confidentiality so that disclosure is restricted to those who are closely involved with the management and financing of the firm The positive sign for the ratio of independent directors on the board provides support for H5 in that companies with a higher proportion of independent directors on the board disclose more voluntary information in their annual reports A possible explanation of this result is that INDEP in Egypt are likely to actively pressing the company to disclose more non-mandatory information This result supports the Williamson (1985) framework, and the intuition that greater board independence is linked to more transparency and better monitoring This is inconsistent with Haniffa and Cooke (2002), Ho and Wong (2001) and Ghazali and Weetman (2006) who found the ratio of independent directors to total directors on board to be insignificant Ho and Wong’s disclosure index score includes the voluntary disclosure items perceived as most important by analysts but the index score adopted in this study did not take this issue into consideration This significance presence of independent non-executive directors may reflect a similarity between de jure and de facto independence In contrast, Eng and Mak (2003) found a significant negative association in Singapore companies Similarly, Barako et al (2006) found a significant negative association in Kenyan companies The results suggest that external directors in Egypt play a complementary monitoring role to disclosure whereas in Eng and Mak (2003) Singapore sample, and in Barako et al (2006) Kenyan sample they play a substitute role to disclosure Again, the proportion of independent directors on the board is significant at the 5% level in explaining two types of information disclosure (STRAT and CSR) and in the predicted direction Information disclosure is likely to be high in companies with a higher proportion of independent directors on the board Number of shareholders is neither significant in explaining overall voluntary disclosure nor any partial category of disclosure (except CSR), indicating that ownership diffusion is not influencing voluntary disclosure levels Thus, H1 that companies with a larger number of shareholders are likely to have a higher extent of voluntary disclosure is not supported This is consistent with Ghazali and Weetman (2006) who found it to be not statistically significant in explaining any type of information disclosure in Malaysia The results show that two aspects of ownership – managerial and government – are not related to voluntary disclosure Thus, H3 and H4 that voluntary disclosure increases with decreases in managerial and government ownership are not supported The result for managerial ownership is inconsistent with the findings in Ghazali and Weetman (2006) who found that information disclosure is likely to be less in owner-managed companies The Egyptian experience 81 However, the result for government ownership is consistent with Ghazali and Weetman (2006) who found that government ownership is not influencing disclosure levels The result for both variables is inconsistent with the findings in Eng and Mak (2003) who found that Singapore firms are less likely to provide voluntary information as managerial and government ownership increases Profitability and internationality were significant in explaining overall voluntary disclosure (VDIS) and financial (FIN) disclosure More profitable companies disclose additional information to signal that the company is being well managed and professionally run while at the same time screening better-performing companies from those performing less International firms competing for foreign resources tend to expand their financial and accounting disclosure as bonding for resource providers This expanded disclosure is assumed to reduce resource providers’ uncertainty about transactions with the firm and, in turn, enables the firm to obtain resources at lower costs The variables representing type of auditor, industry type, size, leverage and liquidity are not statistically significant in any of the models The insignificance of the size variable is inconsistent with prior research (Ghazali and Weetman, 2006; Ho and Wong, 2001) who indicated that larger companies seek to satisfy the information demands of investors, to attract prospective investors to the company and to compete for international funding Large companies are also expected to have better governance structure with clear separation between owners and managers This could occur because large firms need more financing capital than smaller firms The general lack of influence of size on voluntary disclosure may be related to the fact that that the EGX 100 companies are the highest in terms of market capitalisation, so that all sample companies have reacted similarly 5.3 Tests on robustness of the model: sensitivity tests A series of additional tests were conducted to test the models robustness Firstly, an OLS regression test was also conducted by dropping all control variables from the model The results of this test (not presented in the tables) were qualitatively similar to those of the model with all control variables (Table 5) Secondly, a General White Test was performed to examine the distribution of error terms of the OLS regression test conducted on all firms and the results indicated that heteroskedasticity did not constitute a significant threat to the validity of our findings Thirdly, in corporate governance research the issue of endogeneity is a major concern The issue of ownership structure suggests possible double counting particularly in respect to ownership concentration where the block-holder may also be an insider like the CEO In this case, this could lead to collinearity issues Whilst VIF factors and correlation not suggest grave issues this is still a concern Therefore, we run separate regressions with one ownership structure variable included but other ownership structure variables excluded The results (not reported here) indicated that all experimental variables (INDEP, ACOM and BLKOWN) remained statistically significant with signs as predicted in all tests Thus, we infer from these results that multi-collinearity also did not provide any threat to the validity of our findings Finally, we conducted four reduced models based on the corporate governance variables and control variables found to be significant in the four full regression models reported in Table This method is utilised by Haniffa and Cooke (2002) in their study of corporate governance and voluntary disclosure The reduced regression model contains 82 K Samaha and K Dahawy all the three test variables in the full VDIS model (INDEP, ACOM and BLKOWN) and the internationality and profitability control variables, which was significant in two of the four regression models The reduced model regressions are all significant (p-value 0.000), with F-ratios and adjusted R2 s ranging from 12.547 and 0.368 for FIN to 23.128 and 0.528 for CSR The results (not reported here) are similar to the full model in that all experimental variables (INDEP, ACOM and BLKOWN) remained statistically significant with signs as predicted in all tests Conclusion This paper provides evidence in line with Eng and Mak (2003) and Cheng and Courtenay (2004) in Singapore, Ho and Wong (2001) in Hong Kong and Ghazali and Weetman (2006) in Malaysia that voluntary disclosure in the developing countries is problematic The overall disclosure level is very low at just 13.43% This evidence about voluntary disclosure is potentially problematic, as the low disclosure levels may be indicative of less transparency These scores place Egypt at a lower level than Singapore, Hong Kong and Malaysia investigated by Eng and Mak (2003), Cheng and Courtenay (2004), Ho and Wong (2001) and Ghazali and Weetman (2006), who found results of: 21.75%, 28.91%, 29% and 31%, respectively for the overall voluntary disclosure level The variances of these results support the need for individual country level studies and comparative analysis Although, the Egyptian government has made great efforts to set a corporate governance code for listed companies in recent years, the effect of those regulations or rules are yet to be seen In fact, inadequate information is available in the annual reports of most Egyptian companies for investors The understandability of voluntary information disclosed by Egyptian companies is far from acceptable at present, as insufficient information is available in their financial reports A probable clarification for the very low levels of voluntary disclosures by the sample companies may be related to the poor enforcement process applied by the EGX as argued by Samaha and Stapleton (2008) In this paper, we provide evidence on the corporate governance determinants of voluntary disclosure Overall, the findings of this research are strongly consistent with the predictions of agency theory (as measured by existence of audit committees, proportion of independent directors on the board and block-holder ownership) The analysis shows that type of auditor, size, leverage, number of shareholders and liquidity of the firm not seem to affect the extent of its voluntary disclosure, which limits the support for agency and signalling theories Since compliance is not related to manufacturing and non-manufacturing sectors this limits the support for political process theory This may indirectly suggest that the positive accounting perspective may not be entirely applicable for voluntary disclosure in Egypt The new provisions to enhance corporate governance are statistically significant in explaining voluntary disclosure in annual reports This implies that the efforts of regulators to enhance corporate transparency did have some parallel effect in changing the attitudes of listed companies towards more voluntary information disclosure at the point of regulatory change However, the level of disclosure is still minimal Consequently, these findings have policy implications regarding the strategies needed to secure listed firms transparency in the future, and to which future research should be The Egyptian experience 83 directed These strategies should include improve corporate governance practices by enforcing the CG code requirements EGX should be one of the main driving forces hand-in-hands with the companies department of the MOFT to regulate the activities of listed companies Companies should be required to include a minimum number of independent directors on board committees dealing with potential conflict of interest issues There are no rules in Egypt that govern ‘independence’ of the board The 2003 listing rules introduced the concept of ‘non-executive director’ for the first time By most reports, implementation has been slow, and few companies appoint truly independent board members outside the banking sector Although the EGX listing rules of 2003 require the mandatory creation of audit committees as a priority, to oversee and work with the companies internal and external auditors and to secure more corporate transparency, however, it can be seen that just 21 of the top 100 companies on EGX have audit committees This is supported by the World Bank report (2004) which revealed that this rule is partially observed This calls for greater enforcement of the EGX listing rules The next revision of the listing rules could include enforcement for independent nomination and audit committees, and an expansion of the role of the audit committee It is important to recognise that this research must be interpreted in light of some limitations Firstly, there is subjectivity inherent in the scoring of annual reports, which can be managed by detailed rules and cross checking, but it can never be completely eradicated Secondly, there has been no attempt to assess the information needs of users, and each item was weighted equally, assuming that each has the same information content, whereas, in practice, some information may have higher value to users of corporate annual reports than others The choice not to weight the indices may (Naser and Nuseibeh, 2003) or may not (Chow and Wong-Boren, 1987) affect measured compliance rates Finally, the study was cross-sectional in nature and only the reporting practices for the financial year ended 2006 were examined, which may have been too close to the change in corporate governance requirements However, future research to measure voluntary disclosure longitudinally would allow us to capture the effects of the requirements after a learning period Notwithstanding these 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management discussion and analysis in the annual report Needles 1997 conducted a 32-year review of 768 international accounting research articles noted that, “most attention was given to the United States (319 articles), followed by the United Kingdom (123 articles), Canada (58 articles)…over the entire period, the developing countries percentages decreased from 18% to 15%” (p.208) It is important to note that the Egyptian governmental year starts in 1st of July and ends in June 30th of the following year Available at: http://www.eiod.org/ See for example: Raffournier (1995), Meek et al (1995), Ho and Wong (2001), Eng and Mak (2003) and Ghazali and Weetman (2006) Four items in the Chau and Gray (2002) checklist relating to acquisitions and disposals were found to be mandatory by the new EASs issued in mid-2002, which apply to the financial year starting 2003 Therefore, these four items were excluded In addition, four items about segmental information were excluded as they were found to be mandatory by the new EASs In addition all items relating to fixed assets, intangibles and foreign currency were also excluded as they are mandatory by the EASs Prior to performing the multi-variate analysis, a multi-collinearity test was performed using Pearson’s product moment correlations (Table 5) A bivariate correlation above 0.80 is problematic (Field, 2003) The highest correlation coefficient in Table did not exceed the 0.8 level for concern (Field, 2003; Street and Bryant, 2000; Street and Gray, 2002) Therefore, the problem of multi-collinearity is minimal, giving support to the appropriateness of multi-variate analysis The regression results for VDIS and VDIS are similar, thus only one overall disclosure model (VDIS 2) is reported 90 K Samaha and K Dahawy The use of this statistical tool is based on the assumptions that there is no significant multi-collinearity between the explanatory variables, and conditions of linearity and normality (Chau and Gray 2002) Our tests showed only low coefficients in the correlation matrix suggesting that the problem of multi-collinearity was minimal, although it can still exist even when none of the bivariate correlation coefficients is very large, since one independent variable may be an approximate linear function of a set of several independent variables Another effective means of testing multi-collinearity is to compute the variance inflation factor (VIF) VIF measures the degree to which each explanatory variable is explained by the other explanatory variables Very large VIF values indicate high collinearity VIF was generated by SPSS for each of the independent variables These did not exceed 2, and are thus well below the common cut-off threshold of 10 (Field, 2003), indicating that multi-collinearity did not exist in the multiple regression model The largest condition index was 4.489, well below the danger value of 30 (SPSS Manual, 2000, pp.6–4) Furthermore, the lowest tolerance value in the models is 0.682 which is far from the cut-off threshold 0.2 (Field, 2003) This means that each predictor in the OLS models has at least 68% of its variation independent of the other predictors This confirms the VIF statistic that there is no multi-collinearity in the models The results of the regression analysis can, therefore, be interpreted with a greater degree of confidence The Egyptian experience 91 Appendix The voluntary disclosure checklist used in the current study Items and categories of voluntary disclosure Brief history of company/company profile s Corporate vision and mission s Corporate structure s General corporate information sub-index Statement of strategy/objectives: general s Statement of strategy/objectives: financial s Statement of strategy/objectives: marketing s Statement of strategy/objectives: social s Significant events calendar s Impact of strategy on current results s 10 Impact of strategy on future results s Corporate strategy sub-index 11 Statement of future prospects: qualitative s 12 Qualitative forecasts of sales f 13 Quantitative forecasts of sales f 14 Qualitative forecasts of profits f 15 Quantitative forecasts of profits f 16 Qualitative forecasts of cash flows f 17 Quantitative forecasts of cash flows f 18 Assumption underlying the forecast f Future prospects sub-index 19 Age of directors s 20 Educational qualifications s 21 Commercial experience of the non-executive directors s 22 Commercial experience of the executive directors s 23 Other directorships held by the non-executive directors s 24 Other directorships held by the executive directors s 25 Position or office held by executive directors s Information about directors sub-index 26 Review of operations by divisions – turnover f 27 Review of operations by divisions – operating profit f 28 Review of operations – productivity f Review of operations sub-index 29 Discussion of major types of products/services/projects s 30 Improvement in product quality s 31 Improvement in customer service s 32 Distribution of marketing network for finished products s 33 Customer awards/ratings received s 92 K Samaha and K Dahawy The voluntary disclosure checklist used in the current study (continued) Product/service information sub-index 34 Geographical production – quantitative f 35 Line of business production – quantitative f 36 Competitor analysis – qualitative s 37 Competitor analysis – quantitative f 38 Market share analysis – qualitative s 39 Market share analysis – quantitative f Segmental information sub-index 40 Discussion of company’s R&D activities s 41 Corporate policy on R&D s 42 Location of R&D activities s 43 Number employed in R&D s Research and development sub-index 44 Breakdown of employees by line of business CSR 45 Breakdown of employees by level of qualification/exec vs non-execs CSR 46 Breakdown of employees by ethnic origin CSR 47 Employees appreciation CSR 48 Employees training CSR 49 Amount spent on training CSR 50 Nature of training CSR 51 Policy on training CSR 52 Number of employees trained CSR 53 Discussion of employee welfare CSR 54 Safety policy CSR 55 Information on accidents CSR 56 Cost of safety measures CSR 57 Policy on communication CSR 58 Equal opportunity policy statement CSR 59 Recruitment problems and policy statements CSR Employee information sub-index 60 Statement of internal control CSR 61 Value added statement CSR 62 Product safety CSR 63 Environmental protection programmes: qualitative CSR 64 Environmental protection programmes: quantitative CSR 65 Charitable donations/sponsorships CSR 66 Participation in government social campaigns CSR 67 Community programmes (health education) CSR The Egyptian experience 93 The voluntary disclosure checklist used in the current study (continued) Social and environmental reporting sub-index 68 Profitability ratios f 69 Gearing ratios f 70 Liquidity ratios f 71 Cash flow ratios f 72 Financial history or summary (3 or more years) f Financial review sub-index 73 Stock exchanges where shares are traded f 74 Volume of shares traded (trend) f 75 Volume of shares traded (year-end) f 76 Share price information (trend) f 77 Share price information (year-end) f 78 Market capitalisation (year-end) f 79 Domestic and foreign shareholdings f 80 Distribution of share holdings (types) f Market-related information sub-index ... sub-index Social and environmental 50 reporting sub-index Financial review sub-index 60 Research and development 100 sub-index Employee information sub-index 50 Future prospects sub-index 50 Information... help investors who are interested in investing in Egypt in understanding the Egyptian corporate governance and disclosure environment This study extends academic research by comparing findings... IAS/IFRS, financial reporting and corporate governance mechanisms, audit procedures and methodologies, financial reporting on the internet and the implementation of accounting information systems in