Information asymmetry and investor valuation of Egyptian firms: do corporate leverage and profitability matter?
Mai Alm-El-Din, Yasser Eliwa, Ahmed HassaneinPurpose
This study aims to investigate the extent to which information asymmetry affects corporate investor valuation, drawing on the pecking order, agency and signaling theories. Similarly, it examines how corporate leverage and profitability levels affect the relationship between information asymmetry and corporate value.
Design/methodology/approach
The study’s sample consists of Egyptian firms listed on the Egyptian exchange (EGX) 100 index from 2015 to 2022. A wide (narrow) bid-ask spread indicates high (low) information asymmetry. The corporate value of Egyptian firms is measured using Tobin’s Q ratio. This study also used the market-to-book ratio to assess the firm’s value.
Findings
The results reveal that Egyptian listed firms with high levels of information asymmetry, particularly those with wide bid-ask spreads, tend to experience a diminished market value. However, both financial leverage and firm profitability mitigate the inverse impact of information asymmetry on corporate value, highlighting their moderating roles in this nexus.
Practical implications
Egyptian firms should enhance transparency and reporting to improve investor confidence and market valuation. Firms with high information asymmetry can use leverage and profitability metrics strategically to signal stability and mitigate negative impacts on value. Likewise, policymakers should enforce stronger disclosure standards to foster market efficiency in Egypt.
Originality/value
Our study examines the relationships among corporate value, information asymmetry and the moderating effects of firm leverage and firm profitability. To the best of the authors’ knowledge, this is the first empirical study to investigate this nexus in Egypt, thereby extending the literature to a developing economy characterized by high information asymmetry.