Mres dissertation

The York Management School

Corporate Risk Disclosure: A Content Analysis of the Annual Reports of Egyptian Listed Companies

By Mahmoud Marzouk B.Com in Accounting –Menoufia University, Egypt

Supervisor: Professor Philip Linsley Professor of Accounting and Risk Head of Accounting & Finance Group

A dissertation submitted in part fulfilment of the degree of MRes in Management

The York Management School University of York September 2013

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

Acknowledgements First of all, I would like to thank the almighty Allah, the most merciful, the most kind and the glorious, for granting me strength to complete this dissertation.

I am grateful to my country, Egypt, for the financial support of my postgraduate studies and hoping for a promising future.

I would like to express my deepest appreciation to my supervisor, Professor Philip Linsley, for his continuous support, valuable guidance and suggestions. His thoughtful and constructive comments helped me to significantly improve the quality of this dissertation.

I am extremely grateful to my parents and siblings for their infinite love, support and sacrifice.

Last but not least, I would like to thank my wife for her love, encouragement and understanding.

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

Abstract Corporate risk disclosure (CRD) has recently gained considerable attention particularly after the corporate failures and accounting scandals in the US in 2000 and the global financial crisis of 2007-09. This study seeks to explore the nature of risk information provided by Egyptian listed companies within their annual reports. The study also investigates the determinants of risk disclosure through examining the relationship between the level of CRD and company-specific characteristics, namely company size, industry type, profitability, cross-listing and amount of reserves. A content analysis of the annual reports of 31 non-financial listed companies was done to answer the research questions by reading the annual reports and coding sentences that reveal risk information. The study found that companies tend to disclose more monetary, future and good information on the risks they are exposed to. The results also show a positive and significant relationship between company size and the level of CRD. On the other hand, the findings demonstrate that there is a positive but insignificant relationship between the extent of CRD and the industry type, profitability and cross-listing. Moreover, the study found a negative and insignificant relationship between corporate reserves and the level of CRD. This study contributes to the limited body of literature on CRD in the Arab world in general and in Egypt in particular. However, further research is needed to address the different aspects of CRD. The findings of this study also have a number of important implications for future practice and further CRD requirements and empirical research.

Keywords: Risk, CRD, Content Analysis, Egypt.

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

Contents Acknowledgement .....................................................................................................................ii Abstract .................................................................................................................................... iii Contents .................................................................................................................................... iv List of Tables……………………………..…………………….……….. ..............................vii List of Abbreviations………………………….…..………………......... ............................. viii Chapter 1: Introduction.............................................................................. ................................ 1 Chapter 2: Literature Review.................................................................... ................................. 5 2.1. CRD practices and determinants: International experiences... ........................................ 5 2.1.1. USA……………………………………………………… ...................................... 5 2.1.2. UK……………………………………………………….. ...................................... 7 2.1.3. Canada…………………………………………………... ....................................... 9 2.1.4. Europe…………………………………………………... ........................................ 9 2.1.5. Australia…………………………………………………...................................... 13 2.1.6. Asia……………………………………………………… ..................................... 14 2.1.7. Cross-country……………………………………………...................................... 16 2.1.8. Africa and the Middle East……………………………… ..................................... 17 2.2. Relevance of CRD.................................................................... ..................................... 21 Chapter 3: The Egyptian Context………………................................... ................................. 26 3.1. The Regulatory Context……………………………………….. .................................. 26 3.1.1. The Companies Act………………………………………. ................................... 26 3.1.2. The Capital Market Law…………………………………. .................................... 26 3.1.3. The Listing Rules………………………………………….................................... 27 3.1.4. Corporate Governance Rules……………………………. ..................................... 28 3.1.5. The Egyptian Accounting Standards……………………. ..................................... 30 3.2. The Political Context……………………………………………................................. 32 Chapter 4: Research Questions and Hypotheses Development……….. ................................. 35 4.1. Research Questions…………………………….……………….. ................................ 35 iv

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

4.2. Hypotheses Development………………………………………. ................................. 35 4.2.1. The Attributes of CRD……………………………………… ................................... 35 4.2.1.1. The Nature of CRD (Quantitative or Qualitative).… .......................................... 36 4.2.1.2. The Time Orientation of CRD (Future or Past)……. .......................................... 36 4.2.1.3. The Tone of CRD (Good or Bad)…………………… ........................................ 37 4.2.2. Company-specific Characteristics…………………………. ..................................... 38 4.2.2.1. Company Size……………………………………….. ........................................ 38 4.2.2.2. Industry Type………………………………………… ....................................... 39 4.2.2.3. Profitability………………………………………….. ........................................ 39 4.2.2.4. Cross-listing………………………………………… ......................................... 40 4.2.2.5. Amount of Reserves……………………………….... ........................................ 41 Chapter 5: Research Methodology…………………………………………........................... 42 5.1. Sample Selection and Data Collection……………………...... .................................... 42 5.2. Research Method……………………………………………... .................................... 46 5.2.1. The Content Analysis Approach………………………......................................... 46 5.2.2. The Coding Process…………………………………... ......................................... 48 5.3. Reliability of Measurement………………………………….... ................................... 49 5.4. Measurement of Variables…………………………………… .................................... 49 5.4.1. Dependent Variable…………………………………… ........................................ 49 5.4.2. Independent Variables…………………………………. ....................................... 50 5.5. The Statistical Model………………………………………….. .................................. 50 Chapter Six: Data Analysis and Results…………………………………… .......................... 52 6.1. Overall Analysis………………………………………………. ................................... 52 6.2. Descriptive Analysis………………………………………….. ................................... 56 6.2. Determinants of CRD…………………………………………. ................................... 60 6.2.1. Company Size …………………………………………. ....................................... 60 6.2.2. Industry Type…………………………………………. ......................................... 62 6.2.3. Profitability…………………………………………….. ....................................... 62 6.2.4. Cross-listing……………………………………………. ....................................... 63 6.2.7. Amount of Reserves……………………………………. ...................................... 63 Chapter Seven: Conclusion, Limitations and Future Research……………. .......................... 64 v

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

Bibliography………………………………………………………………….... .................... 66 Appendices…………………………………………………………………….. ..................... 79 Appendix A: Risk disclosure categories………………………………. ............................. 79 Appendix B: Decision rules for risk disclosure ………………………. ............................. 81 Appendix C: CRD coding grid ……………………………………….. .............................. 83

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

List of Tables Table 4-1: The key events in 2011 …. ..................................................................................... 33 Table 5-1: A list of the sample companies …......................................................................... 43 Table 6-1: Aggregate risk disclosure for sample companies… ............................................... 54 Table 6-2: Descriptive statistics for pairs of variables in hypotheses … ................................. 56 Table 6-3: Output of SPSS for paired samples test….............................................................. 58 Table 6-4: Output of SPSS for multiple regression… ............................................................. 61

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

List of Abbreviations BoD

Board of Directors

CG

Corporate Governance

CRD

Corporate Risk Disclosure

EAS

Egyptian Accounting Standards

EGX

Egyptian Stock Exchange

EIoD

Egyptian Institute of Directors

FRR

Financial Reporting Release

FTSE

Financial Times Stock Exchange

GDRs

General Depository Receipts

IAS

International Accounting Standard

ICAEW

Institute of Chartered Accountants in England and Wales

IFRSs

International Financial Reporting Standards

Nilex

Nile Stock Exchange

MD&A

Management Discussion& Analysis

OFR

Operating and Financial Review

SEC

Securities and Exchange Commission viii

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

UK

United Kingdom

USA

United States of America

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

Chapter One: Introduction There has recently been a growing attention paid to the area of corporate risk disclosure (CRD) within the accounting literature, corporate reporting practices and disclosure regulations (Dobler, 2005; Dobler; 2008). It has been argued that CRD has lately gained considerable interest, particularly because of the increasing demand for more information on risks as a result of the corporate failures and accounting scandals in 2002 at a number of US companies such as Enron, HealthSouth, Tyco, Enron and WorldCom as well as the global financial crisis of 2007-09 (Lajtha, 2005; Singleton-Green and Hodgkinson, 2011). A number of prior CRD studies have highlighted the underlying importance of risk-related information to investors and the need for improved disclosure of risks (Beretta and Bozzolan, 2004; Cabedo and Tirado, 2004; Deumes, 2008; Hassan, 2009; Linsley and Shrives, 2006; Mousa and Elamir, 2013; Rajab, 2009).

Moreover, the professional accounting bodies, standard-setters and capital market regulators in highly regulated countries, such as the UK, US, Germany and Canada, have paid a great deal of attention to CRD in recent years and issued disclosure regulations and guidelines to encourage companies to provide more information on risks within corporate reports and to meet the information needs of shareholders. However, Linsley & Shrives (2006) and Lajili and Zueghal (2005) underline the paucity of empirical research on the volume and nature of risk disclosure made by companies; particularly non-financial companies (Dobler, 2008), and call for more studies to further close the gap in literature.

Although organizations generally operate in unstable business environments imposing various risks caused by several internal and external factors (Cabedo and Tirado, 2004; Mousa and Elamir, 2013). There have, however, been a number of studies that indicate the lack of risk information reported by companies within annual reports and recommend improving the quantity 1

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

and quality of CRD so that investors can better predict the future company performance and assess the level of risk it faces (Bretta and Bozzolan, 2004; Cabedo and Tirado, 2004; Linsley and Shrives, 2006). This despite the fact that the annual report is the main vehicle for corporate disclosure which provides information to assist investors, current and potential shareholders, in measuring company’s potential returns and exposure to risks. Schrand and Elliot (1998) also argue that financial statements provide insufficient information about risks and uncertainties. On the same vein, Cabedo and Tirado (2004) recommend developing the current disclosure framework to help companies measure and disclose more risk-related information in their annual reports.

Linsley and Shrives (2006) study of FTSE 100 non-financial firms found that UK companies tend to report little information on risks. They argue that mangers withheld risk-related information either because of their unwillingness to disclose commercially sensitive information or the absence of safe harbour protection as they seek to avoid litigation by not providing forward-looking risk information. Likewise, Rajab and Handley-Schachler (2009) refer to the risk information gap between investors’ expectations and the level of actual CRD, which in turn may lead to the information asymmetry problem. Linsley and Shrives (2006) further claim that this gap will always exist even if risk disclosure is made compulsory. Cabedo and Tirade (2004) attribute this lack of risk information to the deficiency in the current disclosure framework and recommend improving this framework to incorporate detailed information on risks. They, therefore, propose an additional statement within corporate reporting where companies can discuss the different types of risks they are exposed to.

On the other hand, most longitudinal studies of CRD found an increasing level of risk reporting mainly within corporate annual reports and particularly with the introduction of additional risk 2

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

disclosure requirements; for example Konishi and Ali (2007), Neri (2010), Rajab and HandleySchachler (2009), Rajab (2009) and Deumes (2008). However, it has been argued that CRD lacks clarity, readability and quantification of risks and their actual or potential impacts which make it difficult for investors to predict company’s future profits and risk exposure (Lajili and Zeghal 2005; Linsley and Lawrence, 2007). Moreover, Beretta and Bozzolan (2004) claim that companies do not disclose future information on risks. This has also led the ICAEW in 1999 to set out benefits of risk disclosure not only to investors but also to companies in an attempt to encourage companies to disclose more risk information. The ICAEW has further emphasized the need for future and quantified information on risks to enrich the information content of annual reports. A number of studies have also underlined the importance of risk quantification and disclosure of quantitative risk information (Beretta and Bozzolan, 2004; Linsley and Shrives 2000; Cabedo and Tirado, 2004). Furthermore, Lajili and zeghal (2005) argue that risk assessment is essential for risk management and hence for risk reporting.

Indeed, whereas the majority of previous studies have focused on measuring the amount of risk disclosure within corporate reports. Lajili & Zeghal (2005) and Dobler (2008) have raised concerns about the quality of risk information provided by companies. Likewise, Beretta and Bozzolan (2004) highlight the importance of improving risk disclosure quality and further indicate that quantity cannot be used as a proxy for CRD quality. They also explain that accounting and disclosure regulations do not prescribe methods for measuring the impact of risks. Miihkinen (2012) also claims that regulations lack explanations of the concept and nature of risks and uncertainties that companies should report on. On the same vein, Rajab and Handley-Schachler (2009) argue that regulations can increase the level of risk disclosure but they still have little impact upon the quality. However, Linsley and Shrives (2005a) point out that 3

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

disclosure regulations in the UK have contributed to improving CRD by obliging companies to provide such information. Solomon et al. (2000) conducted a questionnaire to investigate risk reporting from the viewpoint of a sample of institutional investors. The respondents recommended that companies voluntarily disclose risk-related information to shareholders. The respondents also underlined the fundamental importance of risk information for making informed investment decisions.

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

Chapter Two: Literature Review 2.1. CRD practices and determinants: International experiences Hassan (2009) correctly claims that the vast majority of prior literature on CRD has been predominantly undertaken in the developed countries in Europe and North America. The largest body of literature on risk disclosure has been particularly conducted in the UK and the US and it has also received more regulatory attention in both countries. Nevertheless, a number of studies were also done in some other developed countries and emerging capital markets especially in Asia such as Japan (Mohobbot, 2005; Konishi and Ali, 2007; Kim and Yasuda, 2013; Kim and Fukukawa, 2013), Australia (AFAANZ, 2011; Taylor, Tower and Neilson, 2009), the United Arab Emirates (UAE) (Hassan, 2009; Uddin and Hassan, 2011), Malaysia (Amran, Bin and Hassan, 2009; Othman and Ameer, 2009; Arshad and Ismail, 2011; Zadeh and Eskandari, 2012a; Zadeh and Eskandari, 2012b; Ismail, Arshad and Othman, 2012), Iran (Ramezani et al., 2013), Thailand (Kongprajya, 2010), Bahrain (Mousa and Elamir, 2013), Egypt (Mokhtar and Mellett, 2013) and South Africa (Ntim, Lindop and Thomas, 2013).

2.1.1. USA In the USA, there have been a number of previous studies which focused on investigating the pattern of disclosure of particular types of risk. Meier, Tomaszewski and Tobing (1995) analyzed the measurement and disclosure practices of political risks resulting from the Gulf War in the annual reports of US companies operating in Kuwait before and after the war. They found that companies provided inadequate disclosure on the impacts of the war on their exposure to risks.

They also argue that disclosure regulations do not provide guidelines for the assessment and reporting of political risks. Likewise, some studies have explored the disclosure of market risks 5

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

associated with the use of derivative financial instruments and/or analyzed the impact of introducing new disclosure regulations, such as the Financial Reporting Release (FRR) 48, on the pattern and attributes of this type of disclosure and the volatility of interest rates, exchange rates, commodity prices, trading volumes and equity prices (Abdelghany, 2005; Rajgopal, 1999; Roulstone, 1999; Blankley, Lamb and Schroeder, 2002; Linsmeier et al., 2002). These studies concluded that companies tend to disclose more information on market risks in response to the newly adopted disclosure requirements. Nevertheless, Roulstone (1999) found that corporate disclosure of market risks lacks further explanation on risk measurement methods and disclosure policies adopted by companies. He also points out that companies neglect reporting material information required under the FRR 48.

Recently, there have been some studies that examine the effect of introducing mandatory risk disclosure requirements, as companies have been obliged under the SEC disclosure requirement to provide quantitative and qualitative information on risks within the form 10-K, on the amount of risk information disclosed in the risk factor section (Campbell et al., 2011; Kravet and Muslu, 2012; Mirakhur, 2011). All the three studies found that the level of risk disclosure has improved after the implementation of the mandatory disclosure requirements. Campbell et al., (2011) conclude that risk disclosure helps investors assess company risk profile and predict stock prices as well as overcome the information asymmetry problem by ensuring the availability of risk information to all interested parties. However, Kravet and Muslu (2012) argue that, despite risk information communicated reduces investors’ uncertainty, companies use boilerplate risk disclosures. Moreover, Mirakhur (2011) found that risk disclosure made by companies cannot be used to measure Company’s future performance.

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

2.1.2. UK In the UK, there has been a considerable amount of literature on the practices and determinants of CRD. The Institute of Chartered Accountants in England and Wales (ICAEW) took the initiative in 1997 and published the Financial Reporting of Risk – Proposals for a statement of Business risk to encourage listed companies to disclose risk information through demonstrating the benefits of CRD to companies and hence to shareholders. This report proposed an additional statement, statement of business risk, to be included within annual reports in which companies can report upon the level of risk exposure, risk management policies and methods for risk measurement. Following this report, the ICAEW published two other reports, No Surprises – The case for better risk reporting and No Surprises- Working for better risk reporting in 1999 and 2002 respectively, to further emphasize the significance of CRD and risk-related information to companies and shareholders as well as enhance CRD. Moreover, the ICAEW has lately published another report in 2011in response to the calls for more information on risks following the global financial crisis in 2007. The report sheds light on the inadequate risk disclosure provided in corporate reports to shareholders and other users of information and put forward suggestions for better risk reporting. This indicates the significant role of the professional accounting bodies and other regulatory bodies such as the ICAEW and the SEC in highly regulated countries in improving the level of CRD to enrich annual reports and meet the risk information needs of investors and stakeholders.

On the other hand, there have been a growing number of academic studies in the UK that investigate the different aspects of risk disclosure. Most studies were done to examine the nature and quantity of risk information as well as the factors influencing CRD made by UK companies within their corporate reports and in annual reports in particular (Abraham and Cox, 2007; 7

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

Abraham, Marston and Darby, 2012; Elzahar, 2010; Elzahar and Hussainey, 2012; Linsley and Lawrence, 2007; Linsley and Shrives, 2005a; Linsley and Shrives, 2005b; Linsley and Shrives, 2006; Liu, 2006; Elshandidy, Fraser and Hussainy, 2013). Other longitudinal studies have been conducted to explore the changes in the volume and attributes of risk reporting over the time considering the implementation of additional disclosure requirements (Hill and Short, 2009; Yampolskaya, 2006; Rajab and Handley-Schachler, 2009; Rajab, 2009). Overall, the results show that there is a trend of increased risk reporting by UK companies. The findings also show that the implementation of additional risk disclosure requirements have contributed to the improvement in companies’ overall CRD practices. Moreover, the results found that company size, US dual listing and industry type are the most important determining factors of the level of risk disclosure.

Although most studies found that companies tend to provide more information on risks to shareholders over the time particularly with the introduction of new disclosure regulations (Abraham and Cox, 2007; Elzahar and Hussainey, 2012; Hill and Short, 2009; Linsley and Shrives, 2005a; Linsley and Shrives, 2006; Rajab and Handley-Schachler, 2009; Rajab, 2009).

Some have, however, argued that the current risk disclosure is not sufficient and contain vague statements about risks and highlighted the lack of quantified risk information and raised concerns about the relevance of risk information provided to shareholders and other stakeholders (Linsley and Shrives, 2005a; Linsley and Shrives, 2006). Abraham, Solomon and Stevenson (2007) have analysed the quality of narrative risk disclosure within the annual reports of UK listed companies in light of four criteria; Formulaic, Specificity, Capability of measurement and Evidence of measurement. They indicate the poor quality of narrative risk disclosure made by UK companies in their annual reports. They further recommend that regulatory bodies stimulate companies to 8

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

disclose more risk information. This should underline the usefulness of risk information provide by companies and draw the attention not only to the quantity of risk disclosure but also to its quality.

2.1.3. Canada In Canada, Lajili and Zeghal, (2005) conducted a content analysis of the annual reports of 300 Canadian listed companies to explore the volume and nature of risk-related information and disclosure of risk management policies. Although they found that companies have disclosed an increasing amount of risk information in their annual reports. They, however, raised concerns about the quality of risk reporting and the lack of quantified risk information. They have therefore called for improving risk reporting so that the same risk information is made available to all shareholders and other stakeholders to overcome the information asymmetry problem.

2.1.4. Europe There is also growing empirical evidence on risk and risk management disclosure practices in different European countries. In Germany, Berger and GleiĂ&#x;ner (2006) analyse risk disclosure practices within the annual reports of a sample of 92 German non-financial listed companies over the period 2000-2005 considering the introduction of the German Accounting Standard (GAS 5), the national accounting standard that governs disclosure of risks, to examine the impact of implementing GAS 5 on the level and pattern of risk reporting. They found that there is an increase in the total number of risk disclosures with little improvement in the risk disclosure quality.

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

In Italy, there have been a number of risk disclosure studies. Beretta and Bozzolan (2004) have paid particular attention to the quality of CRD as they argue that risk disclosure quality cannot be measured by the quantity of risk information provided by companies. They therefore suggested a framework to analyse and assess the quality of CRD. They have also investigated the effect of company size and industry type on the amount of risk information Italian listed companies reveal within annual reports. They found positive relationships between the level of CRD and both company size and industry type. Neri (2010) has explored risk reporting practices in the annual reports of Italian listed companies over a four-year period from 2005 to 2008 to examine the change in the level and practices of CRD and the impact of implementing the International Accounting Standards (IAS) in 2005 on CRD. He concludes that there has been an increased level of risk disclosure by companies. He also found a positive association between the quantity of risk disclosure and company size. He, however, found a negative correlation between the level of CRD and company risk profile and profitability.

Greco (2012) conducted a longitudinal content analysis study in an attempt to identify the changes in narrative risk disclosure in the management commentary of the Italian listed companies with the adoption of mandatory risk disclosure requirements. In contrast to the prior risk disclosure literature in the developed and highly regulated countries, the researcher found that even with the introduction of mandatory risk disclosure regulations, risk disclosure level and practices have not changed as managers are reluctant to provide more information on risk. This has been attributed to, according to the researcher, either the management reluctance to provide commercially sensitive information that may affect the company’s competitive position and overall performance or the willingness of managers to avoid potential legal claims.

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

In Belgium, Sigrid, Philip and Anneleen (2009) conducted a study to identify the factors influencing the volume of narrative risk reporting within the annual reports of Belgian listed firms. The results of the study reveal that the volume of risk disclosure is significantly positively associated with company size and its level of risk. However, profitability is negatively associated with risk disclosure level. Moreover, none of the aspects of corporate governance such as audit quality, the existence of risk committee or manager, CEO duality and board composition, is related to the amount of risk information.

In Switzerland, Hunziker (2013) conducted the first empirical study to investigate the level of market risk disclosure made by non-financial Swiss companies. He argues that market risk information provided within annual reports helps investors assess the potential risks associated with the use of financial derivatives. He examined the annual reports of 116 non-financial companies considering the introduction of the International Financial Reporting Standard (IFRS 7) that governs disclosure of market risks associated with the use of financial instruments. He found that larger companies provide more information on the market risks than smaller ones. He also found that the level of CRD and company’s level of risk, measured by the gearing ratio, are significantly correlated. However, he found that the amount of risk information is not affected by the company performance.

In Finland, Miihkinen (2010) explores the impact of applying a new national accounting standard on the quality of risk reporting by the Finnish listed companies and examines the factors influencing CRD quality. The results demonstrate that the introduction of the accounting standard has improved both the quantity and quality of risk information disclosed. He found that less profitable companies tend to disclose better quality risk information. He also found that large firms and firms cross-listed in the US provide more quantitative information on risks.

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

In Spain, Cabedo and Tirado (2004) focused on identifying and addressing the various types of risk a company may face and suggesting methods for measuring each of these risks. They highlight the importance of reporting upon risks and the measurement of risks prior to disclosure and recommend that companies prepare a separate additional statement to report on risks. They also raised two important questions regarding whether CRD should be compulsory or voluntary and the types of risks companies should disclose.

In Portugal, Oliveira, Rodrigues and Craig (2011) conducted a content analysis of 81 annual reports of Portuguese non-financial companies including listed and unlisted companies (42 listed companies and 39 unlisted) to examine the attributes and determinants of risk information content. They have also considered the implementation of IAS/IFRS and the European Union’s Modernisation Directive in 2005 to examine their impact on the extent and quality of CRD. They found that risk disclosure made by the Portuguese companies is vague and more past and qualitative risk information was disclosed. They also reported that company size and leverage are the key drivers of the level of risk disclosure. Moreover, they found that the existence of independent directors within the board of listed companies increases the amount of CRD made by these companies. They conclude that neither the level nor the quality of risk disclosure was improved by the newly adopted disclosure regulations.

In Netherland, Deumes (2008) examines the quantity of risk information provided by the Dutch listed companies and the relevance of this information to shareholders. He concludes that Dutch companies provide sufficient risk information in prospectuses that should help investors assess changes in stock prices. Meijer (2011) undertook a study that covers the period 2005 to 2008 to examine whether the quantity and quality of risk disclosure in the annual reports of Dutch listed companies have increased after the global financial crisis in 2007. He also explores the changes 12

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

in the types of risk disclosed in the annual reports after the crisis. In addition, he investigates whether the company size affect either the amount or quality of risk disclosure made by companies. He used the content analysis to measure the quantity of risk disclosure whilst the disclosure index was used to measure the quality. The results reveal that there has been an increase in both the quantity and quality of risk disclosures after the global financial crisis and the types of risk reported upon has also increased. The results also show that both the quantity and quality of risk disclosure are significantly positively associated with company size.

2.1.5. Australia Taylor, Tower and Neilson (2009) investigated financial risk disclosure and management patterns in the annual reports of Australian listed companies over a consecutive five-year period.

They sought to examine the changes in this type of disclosure over time and after the introduction of the International Financial Reporting Standards (IFRS) to Australia as well as explore the relationship between the volume of financial risk disclosure and corporate governance (CG), capital raising and cross-listing. They found that the adoption of the IFRS has improved the level of financial risk disclosure and this level is positively correlated with both CG and capital raising. On the other side, they found a negative association between the risk disclosure attributes and cross-listing. AFAANZ (2011) examined narrative risk disclosure mad by a number of Australian listed companies and its relationship to the institutional shareholders and audit committee. The study found that CRD is significantly positively associated with both the transient-type institutional block shareholders (and not with the dedicated-type institutional block shareholders) and audit committee independence (and not the financial expertise).

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

2.1.6. Asia In Thailand, Kongprajya (2010) conducted a content analysis of the annual reports of a sample of 30 Thai financial and non-financial listed companies to give an insight into the current extent and attributes of risk reporting as well as examine the relationship between the extent of CRD and both the company size and level of risk. The empirical findings reveal that financial companies provide more risk-related information than financial ones and the tendency to disclose more information on good risks. The results further show that the level of CRD is positively associated with company size and its level of risk. However, the results reveal the lack of quantitative and forward-looking risk information.

In Japan, Mohobbot (2005) examines the attributes and factors influencing CRD in corporate narrative disclosure within the annual reports of 90 non-financial Japanese listed companies. He found that companies tend to voluntarily provide risk information within their annual reports. He found, however, that companies disclose more qualitative and backward-looking (historical) risk information. The empirical findings also reveal that company size is the key determinant of the level of CRD. Whereas no relationships were found between the level of CRD and company level of risk, profitability and ownership structure. Another study was conducted by Kim and Fukukawa (2013) to investigate the impact a company auditor may have on its risk reporting level and practices. The results show that the auditor plays an important role that determines the company level of CRD. They found a positive association between the level of risk disclosure and the auditor size. However, they found that companies that have been audited by the same auditor for a long period of time disclose less information on risks. Konishi and Ali (2007) have investigated risk reporting within the annual reports of 100 non-financial Japanese listed companies to identify the driving factors of CRD and the impact of adopting new disclosure 14

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

regulations on the level of risk reporting. They found that companies show high level of compliance with the recent disclosure requirements by providing more risk information. They also found that companies tend to provide more non-monetary risk information and larger companies disclose more information on risk than smaller ones. However, they found that other firm characteristics including company level of risk, industry type, ownership structure and cross-holding structure are not correlated with the quantity of risk disclosure made by companies.

In Malaysia, Arshad and Ismail (2011) have explored CRD from a different perspective, from the managers’ viewpoint, to identify their behaviour towards risk and risk disclosure practices in the annual reports of Malaysian listed companies. They conducted a survey questionnaire to determine risk disclosure practices by managers and accountants who engage in preparing the annual reports based on their perception and understanding of risk and CRD, their experience and educational level. They found that the better the managers’ understanding of risks and risk disclosure, the higher the level of risk disclosure reported to shareholders. Zadeh and Eskandari (2012a) have conducted a review of the prior risk disclosure literature and relevant accounting theories to explore the impact of company size on the level of risk disclosure. They highlight the particular importance of company size as a key determinant of the quantity and attributes of CRD. They also underline the importance of the method chosen to measure company size. In another study, Zadeh and Eskandari (2012b) assess the degree of disclosure compliance by Malaysian listed firms with additional disclosure regulations; the accounting standards FRS 132, FRS 139and FRS 7 introduced in 2006 and 2010, and examine the extent of financial risk disclosure by Malaysian companies. They conclude that the vast majority of companies respond to the implementation of disclosure regulations by reporting more risk information.

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

Ismail, Arshad, Othman (2012) have investigated the usefulness of risk disclosure to companies by examining the effect of the quantity and quality of voluntary risk disclosure on the market value of the firm. They investigated risk reporting practices in the annual reports of Malaysian companies in two years, 2006 and 2009, considering new disclosure requirements issued in 2007 to further identify the impact of these regulations on the amount and quality of CRD. The empirical findings reveal that there has been little change in the quantity and quality of voluntary risk disclosure. They found a positive significant relationship between the amount of voluntary risk disclosure and company’s market value. However, a negative significant relationship was found between the quality of voluntary risk disclosure and the firm’s market value. Amran, Bin, Hassan, (2009) explore the amount of risk disclosure provided by Malaysian listed companies in their annual reports and the relationship between the level of CRD and firm size. They conducted a content analysis of narrative disclosure within the annual reports of 100 Malaysian listed companies to investigate the number of risk disclosures. They found that Malaysian companies provide less information on risks in their annual reports compared to the level of CRD by UK companies as indicated by Linsley and Shrives (2006). They also found a positive and significant relationship between the quantity of CRD and company size. They further indicate that both industry type and company level of risk affect the amount of risk information in annual reports positively.

2.1.7. Cross-country At the international level, there have also been a number of cross-country empirical studies that examine the differences in risk reporting level and practices among firms across different countries considering the institutional setting and disclosure regulations in each country (Dobler, Lajili and Zeghal, 2011; Horing and Grundl, 2011; Elshandidy, 2011; Elshandidy, Ian and 16

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

Hussainey, 2013; Linsley, Shrives and Crumpton, 2006; Probohudono, Tower and Rusmin, 2013; Woods and Reber, 2003). The results of these studies generally reveal that there are no big differences among companies across the different countries in risk disclosure patterns and attributes. This may be because all the countries covered by the studies are highly regulated countries, such as the USA, UK, Germany and Canada, where there are strict disclosure regulations and requirements that companies should comply with. Moreover, the results demonstrate that there is an increasing trend of CRD amongst companies across countries. The results also show some driving factors of CRD that are common among these countries such as company size and cross-listing. However, there are other influencing factors and motives for CRD that differ from one context to another.

2.1.8. Africa and the Middle East In Iran, Ramezani et al., (2013) examined the relationship between the disclosure of market risk made by Iranian listed companies and corporate characteristics. They analysed the annual reports content of 100 companies over a ten-year period. They found that company size, financial leverage and co-variability earnings are significantly positively correlated with the level of market risk disclosure. On the other hand, they found significant negative relationship between the level of market risk disclosure and current ratio, dividend per share and profit growth. They also found an insignificant relationship between earnings variability and the extent of market risk disclosure.

In South Africa, Ntim, Lindop and Thomas (2013) investigated the nature of risk information disclosed by non-financial companies listed on the Johannesburg Stock Exchange (JSE). They also examined the influence of the level and quality of CG on the quantity and quality of CRD.

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

They found that companies disclose more information on non-financial risks which is future, good and qualitative in nature. They found a positive association between the extent of CRD and board diversity, board size and independent non-executive directors. The study also shows that block ownership and institutional ownership are negatively related to the quantity of CRD. Likewise, they found that dual board leadership structure is insignificantly correlated with the quantity of CRD. With regard to the prior risk disclosure literature in the Arab world, little empirical research has been done to address CRD practices and determinants. There have been a few studies that investigated the measurement and disclosure of particular types of risk such as political risks (Mustafa, 1997) and market risks associated with the use of financial derivatives (Abdelathim, 2002; Aamr, 2003). Mustafa (1997) investigated the assessment of political risks and their impacts on multinational companies’ profits and risk exposure. He concluded that there is no unifying concept of political risks. Moreover, he has proposed a quantitative model for measuring political risks prior to risk reporting and management. Abdalathim (2002) has explored the relationship between both company size and industry type and the disclosure of market risks associated with the possession of financial and non-financial derivatives within the annual reports of 35 companies listed on the UAE capital market. He also examined the impact of such information on stock performance. The study concludes that both company size and industry type define the pattern of corporate disclosure of risk information. He further found that disclosure of such information has no impact on firm’s stock performance.

Similarly, Aamr (2003) analysed the market risks associated with the use of financial derivatives from different perspectives, the concept, recognition, measurement and disclosure, to develop the accounting standards governing the disclosure of this type of risk. He also examined the 18

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

relationship between the extent of interest risk disclosure within the annual reports of 79 companies listed on the Egyptian Stock Exchange (EGX) and company-specific characteristics, namely company size and nature of activities, and further investigates whether such characteristics affect the patterns of disclosure. The study found that there is a significant association between the level of interest risk disclosure and both company size and nature of activities, but none of these characteristics influences the patterns of disclosure. Obviously, these studies focus on specific types of risk whilst ignoring other various risks and uncertainties a company faces which does not reflect the actual company risk exposure.

Lately there have been a few studies that extensively investigate risk reporting in some Arab countries. Hassan (2007) conducted the first theoretical study to analyse and evaluate the status of risk assessment and disclosure in Egypt in light of the existing regulations. Moreover, he reviewed prior CRD studies to define the gap in literature and practice and also compared the Egyptian set of rules and legislations with those in highly regulated countries such as the UK and the USA. The study concludes that, despite the striking similarities that exist between the Egyptian disclosure requirements and those in the UK and the USA, yet the listing rules do not oblige companies to disclose risk-related information. The study also highlights the importance of reporting financial and nonfinancial information on risks and recommends reforming disclosure regulations to enhance CRD and transparency.

In an attempt to contribute to narrowing the gap in risk disclosure literature in the Arab world, four empirical studies have been undertaken to tackle this neglected area of research. In 2009, Hassan conducted a study to identify the determinants of CRD by examining the association between the amount of risk information reported within the annual reports of companies listed on the Dubai Financial Market and Abu Dubai Security Market and a number of firm characteristics 19

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

including size, level of risk, industry type and amount of reserves. The study found that a significant relationship exists between the number of risk disclosures and both the firm level of risk and industry type. Whereas it found that company size and amount of reserves are insignificantly correlated with the extent of CRD. In another study, Hassan (2011) examined the effect of CRD within the annual reports of UAE listed companies on share price variances and the risks investors may be exposed to. He assumed that the increased level of CRD should minimize share variances and hence reduces investors’ potential losses and exposure to market risks. However, he found that enhanced risk disclosure cannot help investors predict the changes in share prices, but it can assist them in building better investment portfolios to avoid potential risks and losses.

Likewise, Mousa and Elamir (2013) have investigated the characteristics of risk-related information reported within the annual reports of companies listed on Bahrain Bourse (BHB).

They have also examined the impact of some corporate characteristics on CRD practices. They found that companies provide little information on risks in annual reports. They also found that the major determinants of risk disclosure, either systematic or unsystematic risk disclosure, are company size, level of risk, firm listing, issuance of shares, profitability and percentage of free float.

The only empirical study to date that examines the amount and attributes as well as the factors driving CRD in the annual reports of Egyptian listed companies was conducted by Mokhtar and Mellett in 2013. The study investigated the relationship between the quantity of risk disclosure, voluntary or compulsory disclosure, in annual reports on one side and a number of corporate characteristics including competition, corporate governance, ownership structure, company size, industry type, liquidity and auditor type on the other side. The results reveal that Egyptian 20

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

companies show a low level of compliance with the mandatory risk disclosure requirements and at the same time they voluntarily disclose little risk information within annual reports. The study found that financial risk is the most prevalent type of risk within corporate disclosure. The study also found that CRD tends to be qualitative in nature with more emphasis on historical and good risk information. Moreover, the findings show a number of factors that positively affect the level of CRD including auditor type, board size and competition.

From the discussion above, it is clear that there is a growing interest in risk disclosure within the accounting literature and disclosure regulations in the developed and highly regulated countries in particular. Yet still little empirical work has been done on risk disclosure in the Arab world in general and in Egypt in particular. Hassan (2009) indicates that the empirical evidence on CRD in Arab countries is too limited and more studies are needed to address this critical area of research. This study therefore seeks to contribute to the existing body of literature in an attempt to further close the gap in literature on risk disclosure through investigating the attributes and determinants of CRD in the Egyptian capital market.

2.2. Relevance of CRD A number of previous CRD studies have highlighted the importance of communicating information about risks facing companies to shareholders and other users of information (Beretta and Bozzolan, 2004; Cabedo and Tirado, 2004; Deumes, 2010; Hassan, 2009; Linsley and Shrives, 2006; Mousa and Elamir, 2011; Rajab, 2009; Solomon et al., 2000). The results of prior research reveal that corporate disclosure in general and risk disclosure in particular can be useful to companies, investors, capital markets and the economy in general (Botosan, 1997; Cabedo and Tirado, 2004; Francis, Khurana, and Pereira, 2005). There has also been an increasing demand

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

for more risk information as a result of the large corporate failures and accounting scandals in the US and other global financial crises, while also considering the use of derivative financial instruments and the risks associated with these instruments.

In its report on CRD, the ICAEW (1997) placed a considerable emphasis on the importance of reporting on risks to motivate companies to provide risk information through demonstrating the usefulness of enhanced CRD to companies and hence to shareholders. This report identifies the potential benefits of improved risk reporting for both companies and investors as follows (PP. 58): 1) To provide practical forward-looking information: investors need more future-oriented information on risks to make better decisions through enhancing their ability to predict the company’s future cash flows and assess its future performance.

2) To reduce the cost of capital: the report claimed that companies can lower the cost of capital through enhanced CRD otherwise investors would require higher risk premium or higher rate of return for the uncertainty associated with their investments.

3) To encourage better risk management: the report proposed that improved risk reporting should enhance the company’s ability to effectively manage the risks it faces. Improved CRD should also lead to increased cash flows and greater value for shareholders.

Moreover, it improves the corporate image and produces an appealing picture of the company for investors.

4) To provide other benefits to investors: the report presented some benefits particularly to investors associated with enhanced CRD. First, to ensure that the same information is made available to all investors. Second, investors can evaluate the management

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

performance in light of the risk and risk management information provided. Third, protecting investors through keeping them informed about the company risk exposure.

The academic studies have also suggested additional benefits of enhanced risk disclosure.

Deumes (2008) argues that investors can use risk information to assess the company’s future performance. Risk information can help investors assess the company’s exposure to risk (Cabedo and Tirado, 2004; Campbell et al., 2011; Linsley and Shrives, 2000). Solomon et al., (2000) report that institutional investors revealed that improved risk reporting helps them make better portfolio investment decisions, as current and potential investors tend to make decisions based on both the potential returns and expected risks (Cabedo and Tirado, 2004). Moreover, it has been argued that CRD enables investors to predict stock returns and changes in stock prices (Beretta and Bozzolan, 2004; Deumes, 2008). In addition, a major benefit of increased CRD highlighted by prior studies is protecting investors through overcoming the information asymmetry problem and ensuring that all investors receive the same information at the same time (Campbell et al., 2011; Deumes, 2008; Lajili and Zeghal, 2005; Linsley and Shrives, 2000; Neri, 2010; Rajab and Handley-Schachler, 2009). Therefore, investors can exploit risk information to make informed decisions through enhancing their ability to identify the different risks influencing the company, assess its level of risk and potential returns and estimate the amount and timing of future cash flows (Abraham, Marston and Darby, 2012; Cabedo and Tirado, 2004; Hassan, 2007; Linsley and Shrives, 2005b).

Companies can also benefit from reporting on their exposure to risk. A number of studies have claimed that a major advantage of increased CRD a company can take is the reduction in the cost of capital (ICAEW, 1997; Linsley and Shrives, 2000; Solomon et al., 2000). Rajab and HandleySchachler (2009) argue that companies can voluntarily disclose some information to reduce 23

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

demands for additional information and further disclosure requirements. Another major advantage of CRD is reducing agency costs through overcoming the information asymmetry problem (Rajab and Handley-Schachler, 2009). Risk reporting can also contribute to improving risk management processes and draw investors’ attention to managers’ effectiveness in this regard (Linsley and Shrives, 2000; 2005a).

Furthermore, risk reporting aids the capital markets to function more efficiently. Improved CRD contributes to the enhancement of capital market efficiency through promoting transparency and overcoming the information asymmetry problem which, in turn, should stimulate the economic development (Abraham et al., 2012; Deumes, 2008; Linsley and Shrives, 2005b; Mousa and Elamir, 2013). Increased risk disclosure is also important to the overall investment climate and national economic growth, as it contributes to the improvement and stability of investment environment and capital accumulation (Rajab and Handley-Schachler, 2009).

Based on the above argument, this has drawn the attention of professional and regulatory bodies in different countries to lay down risk disclosure requirements and reform the existing regulations. These regulations are intended to oblige companies to provide more risk information and hence enrich the risk information content of corporate reports to meet the information needs of investors and restore their confidence particularly after the recent global financial crises.

Nevertheless, Dobler (2008, p. 186) states as he asserts the role of CRD incentives that “my main results confirm that regulation cannot overcome incentives in risk reporting at each level of analysis”. Moreover, Linsley and Shrives (2005) justify the lack of risk-related information provided by companies by the managers’ unwillingness to disclose commercially sensitive information, as the costs of CRD might then outweigh the benefits attached to. This lends support to the notion that regulations alone cannot guarantee higher CRD quality. In addition, 24

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

this should also underline the role of capital market regulators, professional accounting bodies, such the case of the ICAEW, and academics to highlight the incentives and benefits associated with CRD to motivate companies to voluntarily report on risks.

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

Chapter 3: The Egyptian Context 3.1. The Regulatory Context Corporate disclosure is governed by the legislations and regulations of the country in which the company operates. In Egypt, a number of legislations and regulatory rules have been enacted to encourage investment and improve the level and quality of corporate disclosure. It is, therefore, of particular importance to explore risk disclosure requirements through investigating the Egyptian regulatory environment and the existing legislations that regulate investment and corporate disclosure.

3.1.1. The Companies Act The Companies Act 159 of 1981 (amended by the law No. 3 of 1998) has been introduced to regulate the functioning of companies operating in Egypt and the formation of new companies.

Each company is generally required, according to this act, to prepare an annual report of its financial position and results of operations according to the Egyptian Accounting Standards (EAS) to be published at a specific time of the year and should include both the management report and audit report.

3.1.2. The Capital Market Law

The Capital Market Law No. 95 of 1992 was issued with the design and implementation of the national privatization program in 1991 to regulate the operation of the capital market and introduce rules determining the issuance and circulation of securities. This law aims at revitalizing the Egyptian economy through attracting new investments and reinforcing investor confidence. Moreover, the law aims at maintaining capital market stability and protecting 26

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

shareholders by enhancing transparency, prohibiting misleading information and ensuring that the same information is made available to all investors to overcome the information asymmetry problem. Companies are obliged under this law to publish and provide copies of their semiannual and annual reports to the capital market authority to be prepared in accordance with the EAS. According to article 6 of the law, companies should immediately report upon any material events or conditions that could affect the company’s financial position and activities. This can be generally interpreted as an indication of the risks and uncertainties facing companies. However, the terms risks and uncertainties are not mentioned in the article.

3.1.3. The Listing Rules The securities listing and de-listing rules of Cairo and Alexandria Stock Exchange (decree No 30 of the capital market authority’s board of directors in June 2002) regulate the functioning of companies listed and companies seeking listing on the Egyptian stock exchange (EGX).

According to articles 20 and 21, companies are required to prepare quarterly and annual reports in accordance with the EAS and send copies of these reports to the capital market authority and the EGX including the financial statements, the management report and auditor’s report.

Companies are also required under the articles 22 and 23 to publish a summary of their semiannual and annual reports to shareholders in two widely read newspapers; at least one of them should be in Arabic.

Article 24 addresses the “irregular material events” a company may face and their impacts on its financial position and share prices. According to this article, “Material changes denote any events that have a tangible effect on the company’s activity or on its financial position that may affect trading of the company’s securities at the Stock Exchange”.The article indicates that each

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

company facing such events should provide timely information on them to the stock exchange to be disclosed to the users of information. The article further provides some examples of material events which could have either positive or negative effects on the company activities and stock performance and that each company should report on such as “Any material change in the investment policies such as opening new branches or activities, liquidating existing branches or activities, shifting into leasing policy instead” and “A lawsuit is raised against the company related to its activity or to any of its board”. The events discussed in this article could also implicitly refer to the different types of risks and uncertainties that a company should disclose.

Moreover, Hassan (2007) also argues that the listing rules in the EGX do not require companies to prepare a separate statement to report risk information within such as the Management Discussion and Analysis (MD&A) and Operating and Financial Review (OFR) in the USA and UK respectively.

3.1.4. Corporate Governance (CG) Rules McGee (2010) argues that investors are more willing to invest in companies that adopt strict governance practices as this should improve transparency, reduce the cost of capital and elevate share prices. In October 2005 and July 2006 the Egyptian Institute of Directors (EIoD) – an affiliate of the Egyptian Financial Supervisory Authority, introduced the code of CG for private sector companies in Egypt and the code of CG for state-owned enterprises in Egypt respectively.

According to rule No. 5-2-30 of CG rules for private sector companies that have been amended in March 2011, the board of directors (BoD) should identify the different actual and potential risks, threats and uncertainties, assess the level of risk the company is exposed to and develop risk management policies considering the company size, its nature of activities and the market in which it operates. The rule also points out that the BoD should provide sufficient and clear 28

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

information on the volume of risks and actions taken to manage these risks. Rule No 5-2-28 has also suggested that the BoD can form a risk committee to identify, measure and manage risks facing the company.

According to rule No 5-2-32, each company should prepare an annual report to disclose and discuss a number of items including the company’s future prospects which refer to both the expected future returns and potential risks and uncertainties. Moreover, rule No 5-3-7 defines the role of the internal audit department in evaluating the methods and procedures for risk management. Whereas rule No 5-3-8 shows that all risks (actual and potential) facing a company should be taken into account when designing its internal audit system and procedures. Along a similar line, the code of CG for state-owned enterprises clearly states in rule 5-6 that companies should disclose information on risks and their impacts on the company’s economic and financial performance as well as risk management policies.

It is clearly evident that CG rules have paid much attention to risk and risk management disclosure as they stated that companies should reveal information on risks, their impacts on the company’s performance and risk management strategies. They do not, however, provide further explanation of the meaning of risk, how risks can be measured and reported and the types of actions management should take to manage them (Hassan, 2007). Furthermore, the Egyptian CG rules and standards are voluntary guidelines for companies intended to protect shareholders through balancing their interests against the interest of company’s management and enhanced disclosure (EIoD, 2011). In addition, according to the Egyptian code of CG, companies’ managements, auditors and counselors are encouraged to adopt and implement governance rules to attain their potential benefits.

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

3.1.5. The Egyptian Accounting Standards (EAS) With regard to the EAS, the newly adopted EAS were issued by the decree No. 243/2006 of the minister of investment to replace the previous accounting standards issued by the two ministerial decrees 503/1997 and 345/2002. The accounting standards have been prepared and issued in accordance with the International Financial Reporting Standards (IFRS) with some exceptions (EFSA, n.d). Indeed, these regulations along with other regulatory rules have been intended to improve the performance of capital market and enhance corporate disclosure and transparency.

Risk disclosure requirements can be explored through addressing a number of accounting standards.

According to item 21 of the EAS 7, listed companies are obliged to disclose information on the nature and the financial impact, either positive or negative, of any events after the reporting period which might affect investors’ decisions. Among the examples given in item 9 of the standard about the events that the company should report on is any financial obligation resulting from adjudication against the company. According to the EAS 13 that addresses the effects of changes in foreign exchange rates, companies are required to disclose either the positive or negative economic and financial impacts resulting from changes in foreign exchange rates when translating foreign currency financial statements and transactions. To put it in another way, companies should provide information on the amount of profits and losses associated with changes in foreign exchange rates. Likewise, the EAS 15 requires companies to reveal information on the effects of related party transactions to help users of information assess their impact on the company’s financial position and results of operations. For example, companies should provide information on the amount of provisions for doubtful debts of the outstanding

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

balances of related parties. As stated in item 8, related party disclosures may influence the ability of information users to assess the company’s activities and level of risk.

Furthermore, there are two other accounting standards, EAS 25 which handles disclosure and presentation of the risks related to the use of derivative financial instruments and EAS 26 which addresses measurement and recognition of these risks. According to the EAS 25, companies are required to provide information that should help investors assess the company’s financial position, business activities and cash flows associated with the use of derivatives as well as assess the level of risk related to their usage. The risks associated with the use of derivative financial instruments, according to item 52, include market risks, credit risks, cash flow risks associated with interest rate fluctuations and liquidity risks. In addition, companies are required to disclose their risk management policies. The item also indicates that market risk disclosure should include information on both the positive and negative effects of risks. However, the standard does not identify a particular pattern of risk disclosure or its location within annual reports. Moreover, the Egyptian accounting standards in general neglect the other various types of risk that face companies and may have influence on their performance. Despite the great similarities between the EAS and the IFRS (Hassan, 2007; Hassan et al., 2009), yet still other disclosure aspects have not been addressed within the EAS and other disclosure regulations as well as in the reports published by the Egyptian professional accounting bodies this could be attributed to the absence of an independent standard-setting board (Hassan, 2007).

In summary, the Egyptian investment legislations and disclosure regulations have paid attention to corporate disclosure in general. They, however, with the exception of CG rules which are only voluntary guidelines for companies, have not addressed the measurement and disclosure of risks.

The accounting standards have particularly addressed the risks associated with the use of 31

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

derivative financial instruments and they do not evidently handle the other types of risk.

Therefore, each company can voluntarily determine the amount and attributes of risk information to disclose to its shareholders and other stakeholders. This could raise concerns about risk disclosure requirements in the existing regulations and highlight the need to improve them.

Furthermore, Elsaman and Alshorbagy (2011) underline the importance of reforming the existing legislations particularly after the 25 January revolution to encourage investments.

3.2. The Political Context The reason behind the selection of the annual reports for the year ended on December 31st, 2011 is because it is the year when the 25 January 2011 Egyptian Revolution took place. The stock market performance during 2011 will be briefly discussed in the following lines in light of the EGX 2011 annual report (EGX, n.d.). The Egyptian capital market witnessed the most severe deterioration throughout its history in 2011 because of the Egyptian revolution and other external crises that have affected the performance of the Egyptian economy negatively. Consequently, the stock market was closed from 28th January till 23rd March, 2011 to protect investors. These events led to a number of negative effects as mentioned in the report. First, the credit rating agencies (Moody’s and Standard and Poor’s) downgraded Egypt’s government bond ratings four times during 2011. Second, the investment outflows totalled four billion Egyptian pounds and the stock trading volume decreased significantly.

In addition, the US debt crisis and the downgrading of its credit rating have also influenced the global economy. As a result of these crises all industry types were affected and the stock market dropped by around 50 %; 21% in January alone. The Capital market authority therefore responded by imposing new rules to enhance disclosure level and transparency. According to

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

these rules, companies have been obliged to report on their financial, operating and administrative performance and ownership structure. However, the capital market authority has not clearly required companies to disclose information on the risks they have been facing. On the other side, there were some positive indicators. First, the amount of capital that listed companies managed to raise on the EGX during 2011amounted to seven billion pounds. Second, nine companies have been listed during this year and the number of investors increased to around 36,000 investors compared to around 35,000 investors in 2010.

The EGX annual report (2011, p. 11) also incorporates a number of key events that occurred throughout 2011 in chronological order as shown in Table 3-1.

Table 3-1: Key events in 2011

Date

Key events

1

25 January

The Egyptian Revolution Started

2

28 January

Trading Suspension

3

23 March

Trading Resumption

4

30 May

Capital gains tax rumour spread

5

12 June

S&P downgraded Egypt’s Credit Rating

6

August

US and Europe debt crisis heightening

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

7

October

EGX 20 Capped Index launch

8

30 October

Moody’s downgrades the Egyptian government bonds’ rating from Ba3 to B1 with a negative outlook

9

13 November

launching NILEX new trading system

10

24 November

Overnight Deposit Rate was raised by 100 bps to reach 9.25% and overnight lending rate was raised by 50 bps to reach 10.25%. The discount rate was also raised by 100 bps to 9.5%

11

28 – 29 November

The parliamentary elections

12

22 December

Moody’s downgrades the Egyptian government bonds credit rating for the fourth time from B1 to B2

As explained above, the revolution definitely imposed particular conditions that have exposed companies to various types of risk. Therefore, all the events mentioned above make this study interesting to examine risk disclosure behaviour of listed companies within the 2011annual reports.

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

Chapter Four: Research Questions and Hypotheses Development 4.1. Research Questions This study seeks to answer the following questions: 1- What is the extent of CRD provided by Egyptian listed companies in their annual reports?

2- What are the major attributes of the risk information disclosed?

3- What are the key determinants of risk reporting practices in respect of these companies?

4.2. Hypotheses Development The purpose of this study is to investigate narrative risk disclosure practices within the annual reports, specifically the management report and the notes to the accounts, of Egyptian companies. Moreover, this study seeks to identify the key factors influencing the extent and nature of risk-related information through examining the impact of company size, industry type, profitability, cross listing and amount of reserves on CRD level. Therefore, the following setof hypotheses are developed in light of the research problem in order to answer the research questions formulated above. The rationale behind these hypotheses is discussed below.

4.2.1. The Attributes of CRD The following hypotheses are tested to explore CRD practices of Egyptian listed companies as well as the characteristics of risk information that define the usefulness of such information to shareholders and other stakeholders.

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

4.2.1.1. The Nature of CRD (Quantitative or Qualitative) Some researchers have highlighted the significance of improving risk reporting through disseminating more quantitative risk information to investors and hence enhance their ability to assess the company risk profile (Beretta and Bozzolan, 2004; Linsley and Shrives, 2000; Linsley and Shrives, 2006). Furthermore, several studies have raised concerns about the lack of quantitative information on risks communicated within corporate reports (for example, Konishi and Ali (2007), Kongprajya (2010), Lajili and Zeghal (2005), Linsley and Shrives (2005a), Linsley and Shrives (2006), Mohobbot (2005), Oliveira, Rodrigues and Craig (2011). Linsley and Shrives (2006) attribute this to the unwillingness of directors to disclose commercially sensitive information that may put the company at a competitive disadvantage. In addition, Linsley and Shrives (2006) indicate that a major obstacle to the disclosure of quantitative risk information is the difficulties associated with quantifying risks. Accordingly, the first hypothesis is formulated as follows: H1: The number of qualitative risk disclosures will be significantly greater than the number of quantitative risk disclosures.

4.2.1.2. The Time Orientation of CRD (Future or Past) Investors need forward-looking information as they are more concerned with company’s future performance, even though they can use historical information as an indicator of the company’s future prospects. Aljifri and Hussainey (2007) state that competitors can use forward-looking information provided by a company to take advantage of its weaknesses and opportunities. It is also argued that forward-looking information helps investors make better investment decisions (Linsley and Shrives, 2005b). Likewise, the ICAEW (1999) placed a particular emphasis on the 36

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

need for more future risk information to be disclosed by companies. The results of a number of previous studies reveal that companies disclose little information concerning future risks (Beretta and Bozzolan, 2004; Kongprajya, 2010; Mohobbot 2005; Oliveira, Rodrigues and Craig, 2011).

This may be due to the absence of safe harbour disclosure as directors seek to avoid potential legal claims for providing inaccurate information (Linsley and Shrives, 2005). It is only Linsley and Shrives (2006) who have found that UK companies provide greater amounts of forwardlooking risk information. This lead to the second hypothesis: H2: The number of past risk disclosures will be significantly greater than the number of future risk disclosures.

4.2.1.3 The Tone of CRD (Good or Bad) It may be assumed that companies are more likely to disclose more good news than bad news to reassure investors otherwise they may face problems raising capital and thus higher costs of capital. Linsley and Shrives (2006) claim that directors are more inclined to disclose good news than bad news to avoid reputational costs that may be associated with negative news. Kongprajya (2010) and Linsley & Shrives (2006) found that good risk disclosures by companies are greater than bad ones. On the other side, Skinner (1994) argues that directors are motivated to voluntarily provide bad news because otherwise they would face legal exposure for withholding material information or providing misleading information. Therefore, the third hypothesis is: H3: The number of good risk disclosures will be significantly greater than the number of bad risk disclosures.

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

4.2.2 Company-specific Characteristics

According to the prior disclosure literature and CRD in particular, there are different factors and corporate characteristics that affect the level of disclosure. The following hypotheses are developed to examine the association between the amount of CRD and a number of company characteristics to identify the factors underlying the level of CRD: 4.2.2.1 Company Size This hypothesis is tested to investigate the impact of company size as a key determinant of CRD level. Previous disclosure studies have focused on examining the influence of company size on the volume of corporate disclosure made by a company. Hossain, Perera and Rahman (1995) argue that investors and analysts usually expect greater disclosure by large companies.

Moreover, Rajab and Handley-Schachler (2009) claim that larger companies tend to provide more information to reduce agency costs and overcome the information asymmetry problem.

Prior disclosure studies found a significant positive relationship between company size and disclosure level; for example, Ahmed and Courtis (1999) and Raffournier (1995). Similarly, the vast majority of previous CRD studies have found that larger companies disclose more risk information than smaller ones (Beretta and Bozzolan, 2004; Hernandez-Madrigal, AibarGuzman and Blanko-Dopico, 2012; Linsley and Shrives, 2006; Sigrid, Philip and Anneleen; 2009). On the contrary, some other studies found either an insignificant or no relationship between company size and the level of CRD (Hassan, 2009; Rajab, 2009; Rajab and HandleySchachler, 2009). Accordingly, as most studies have found a positive relationship between company size and the level of CRD, the fourth hypothesis is formulated as follows: H4: There is a positive association between company size and the level of CRD. 38

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

4.2.2.2 Industry Type The amount of risk information may be influenced by the sector in which the company operates as the industry characteristics, level of competition and market conditions may all determine the level of risk a company is exposed to. However, the results of prior disclosure research are mixed regarding the relationship between industry type and the level of risk disclosure. Aljifri and Hussainey (2007) found an insignificant relationship between industry type and the amount of forward-looking information disclosed by companies. With regard to CRD research, Konishi and Ali (2007) found no association between industry type and the level of CRD. On the other hand, a number of CRD studies found that industry type significantly affect the volume of CRD (Amran, Bin and Hassan, 2009; Beretta and Bozzolan, 2004; Hassan, 2009; Rajab, 2009; Rajab and Handley-Schachler, 2009). Based on the above argument, the following hypothesis is tested: H5: There is a positive relationship between the industry type and the total number of risk disclosures.

4.2.2.3 Profitability One may claim that highly profitable companies are exposed to higher levels of risk and therefore expected to report more risk information to reassure investors and meet their information needs. Aljifri and Hussainey (2007) found that highly profitable companies provide more forward-looking information. However, the results of prior disclosure research are mixed.

Mousa and Elamir (2013) found that profitability and the level of CRD are significantly correlated. However, a number of risk disclosure studies reported a negative association between profitability and the amount of CRD (Allini, Hussainey and Rossi (n.d.); Miihkinen, (2010); Sigrid, Philip and Anneleen (2009); Vandemele, Vergauwen and Michiels, (2009). Mohobbot 39

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

(2005) found no relationship between profitability and the extent of CRD. This argument leads to the sixth hypothesis: H6: There will be a negative relationship between the number of risk disclosures and profitability.

4.2.2.4. Cross-listing Companies willing to raise additional capital seek foreign listings on international capital markets. Only few big Egyptian companies have their shares traded on London Stock Exchange, New York Stock Exchange and Luxembourg Stock Exchange in the form of what is generally known as General Depository Receipts (GDRs). Abraham & Cox (2007) and Rajab & HandleySchachler (2009) indicate that foreign stock exchanges require companies to provide additional disclosure and risk information in particular. Abraham and Cox (2007) suggest that this information should be made available to domestic investors as well. Furthermore, Rajab and Handley-Schachler (2009) claim that cross-listed companies tend to enhance their disclosure levels to increase the trading volume of their securities. Some previous CRD studies found a significant positive relationship between cross listing (Us dual listing) and both the quantity and quality of CRD (Miihkinen, 2010; Rajab, 2009; Rajab and Handley-Schachler, 2009). Therefore, the seventh hypothesis is: H7: There is a positive relationship between cross-listing and the extent of CRD within the annual reports of Egyptian companies.

40

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

4.2.2.5. Amount of Reserves Higher reserves may act as an indicator of higher corporate risk profile. Egyptian companies are required, according to article No. 40 of the Egyptian companies Act No. 159 of 1981 amended by law No. 3 of 1998, to establish mandatory reserves (legal reserves) as a certain percentage retained from company net income to face any potential losses and/or increase their capital.

Moreover, according to this act, companies can have voluntary reserves (systematic reserves) or any other reserves, to be determined by the board of directors, for particular purposes in order to maximize the shareholder value. Little research has examined the association between reserves and CRD level. Hassan (2009) has examined the effect of reserves on the amount of CRD and found an insignificant and negative relationship between reserves and CRD level. Based on the argument above, the eighth hypothesis is tested: H8: There is a positive relationship between the amount of reserves a company holds and the level of CRD.

41

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

Chapter Five: Research Methodology 5.1. Sample Selection and Data Collection By the end of 2011, the total number of listed companies on the Egyptian Stock Exchange (EGX) including financial and non-financial companies was 213 companies in 15 industry sectors. The study population consists of all the non-financial companies (172 companies) listed on the EGX in 2011. The random sample selected for this study comprises 31 non-financial listed companies as at 31st December 2011(Table 5-1). For the purpose of proper sampling, similar industry types have been merged into one sector. The media, technology and telecommunications industries have been merged into one sector as well as the oil & gas and the utilities companies have also been grouped into a single sector. The sample companies were selected according to a number of criteria. First, Financial companies, banks and financial service firms, were excluded from the sample because they carry out different business activities and hence they might face other types of risk as well as financial firms have their own distinctive disclosure standards and reporting requirements (EAS 19, EFSA, n.d.; Linsley and Shrives, 2005b; Miihkinen, 2012; Mousa and Elamir, 2013; Neri, 2010). Second, the sample encompasses companies of different sizes and represents all non-financial sectors to investigate differences in risk reporting practices among industry types and ensure the generality of the research findings.

Third, the sample also comprises four Egyptian non-financial companies that were cross-listed on London Stock Exchange or in the US in 2011 to examine the impact of cross-listing on the level and pattern of risk disclosure. Fourth, only companies that have fiscal years ending on

42

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

December 31, 2011were considered. Finally, the sample size was determined considering the time period available for the study.

Table 5-1: A list of the sample companies

Industry Type

Sampled Companies

1- Basic Resources

2- Chemicals

-

Arab Aluminium

-

Ezz Steel

-

Samad Misr – EGYFERT

-

Kafr El Zayat Pesticides and Chemicals Co.

3- Construction and Materials

-

Arab Valves Company

-

Orascom

Construction

Industries

(OCI)

4- Food and Beverage

-

Sinai Cement

-

Ismailia Misr Poultry

-

Juhayna Food Industries

-

Northern Upper Egypt Development & Agricultural Production

-

5- Healthcare and Pharmaceuticals

Egyptian International Pharmaceuticals (EIPICO)

43

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

-

Nozha International Hospital

6- Industrial Goods and Services and

-

Egyptian Electro Cables

Automobiles

-

El Ahram Co. For Printing and Packaging

7-

Media

and

Technology

and

Telecommunications

8- Oil and Gas and Utilities

-

GB Auto

-

Egyptian Media Production City

-

Egyptian Satellites (Nilesat)

-

Telecom Egypt

-

GMC Group for Industrial Commercial & Financial Investments

-

National Drilling

-

Natural Gas & Mining Project (Egypt Gas)

-

9- Personal and Household Products

Arab Polvara Spinning and Weaving Co.

10- Real Estate

44

-

Olympic Group Financial Investments

-

Oriental Weavers

-

El Kahera Housing

-

Egyptians for Housing & Development

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

11- Retail

12- Travel and Leisure

-

Assiut Islamic Trading

-

B-Tech

-

Egyptian for Tourism Resorts

-

Orascom Hotels and Development

-

Remco for Touristic Villages Construction

Some prior studies have investigated risk disclosure practices in corporate reports and communication channels other than annual reports or within particular parts of the annual report such as in management reports (Bungartz 2003, cited in Dobler 2008, p. 191), in prospectuses (Deumes, 2008; Hill and Short, 2009), and in interim reports (Elzahar and Hussainy, 2012).

While several previous studies have analysed the pattern and factors underlying CRD in annual reports (Amran, Bin, and Hassan, 2009; Dobler, Lajili and Zegha, 2011; Kongprajya, 2010; Huang, 2007; Linsley and Shrives, 2006; Linsley and Lawrence, 2007; Oliveira, Rodrigues, and Craig, 2011; Sigrid, Philip and Anneleen, 2009; Taylor, Tower, and Neilson, 2009).

Accordingly, the 2011 annual reports were used in this study to examine the amount and attributes of narrative risk information disclosed by sample companies. These annual reports were collected via the companies’ websites and Egypt for Information Dissemination (EGID) company for firms that do not publish their annual reports online. Moreover, there are some

45

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

reasons for investigating narrative risk disclosure within corporate annual reports. First, annual reports are available as companies are required by law to publish their annual reports to the shareholders and other users of information. Second, In Egypt, investors mainly use annual reports as their major source of corporate information (Hassan et al., 2009), to assess the company’s performance and make their investment decisions accordingly. Third, Beretta and Bozzolan (2004, p. 285) also argue that the “disclosure of risk is intrinsically narrative”. This signifies the importance of investigating risk disclosure practices within the narrative sections of annual reports.

5.2. Research Method There are different research methods that have been used in the prior risk disclosure studies to examine the extent and pattern of CRD and the usefulness of risk information. The disclosure index method was used by Hassan (2009) to measure the level of CRD by UAE companies.

Likewise, Linsley and Lawrence (2007) have investigated the readability of narrative risk disclosure within annual reports to measure the amount and usefulness of risk information.

However, in the mainstream CRD literature, the content analysis has been widely used as a method to measure the level and identify the attributes of narrative risk reporting (Abraham and cox, 2007; Beretta and Bozzolan, 2004; Lajili and Zéghal, 2005; Linsley and Shrives, (2005; 2006); Linsley, Shrives and Crumpton, 2006; Mousa and Elamir, 2013; Deumes, 2008; Rajab, 2009). On the same vein, the content analysis method was employed in this study.

5.2.1. The Content Analysis Approach The content analysis method has early been used for the analysis of texts (Hardy and Bryman, 2004). Content analysis is defined as “a method that uses a set of procedures to make valid 46

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

references from texts� (Smith, 2004, p. 147). Bryman and Bell (2011, p. 291) also define content analysis as “an approach to the analysis of documents and texts that seeks to quantify content in terms of predetermined categories and in a systematic and replicable manner�. The content analysis approach is used to identify the characteristics and measure the amount of information within a body of text by classifying it into categories according to particular criteria, assigning each unit of information to a category and counting the total number of occurrences or units and the number of frequencies within each category (Silverman, 2011). This study focuses on measuring the quantity of CRD in the narrative section of the annual reports and specifically within the management report and the notes to the accounts. The management report and the notes to the accounts contain plenty of relevant and rich information easier to understand for shareholders than the financial statement information. Therefore, content analysis is, according to Kongprajya (2010) & Mousa and Elamir (2013), more appropriate to investigate considerable amounts of narrative data.

Following the study of Linsley and Shrives (2006), the content analysis was conducted considering a number of factors. First, this study adopts the broad definition of risk which encompasses events and uncertainties that may represent either opportunities (upside risks) or threats (downside risks). Accordingly, the annual reports content analysis considered information on either expected profits or losses associated with certain conditions or events. Second, the whole sentence within annual reports was used as the unit of analysis and hence the number of sentences was used to count the total number of risk disclosures as well as of a particular type of risk disclosure. According to Silverman (2011), the word, sentence, line or paragraph could be used as the coding unit to count the number of occurrences of a particular event. Lajili and Zeghal (2005) used both the number of words and sentences to examine the volume of CRD 47

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

disclosed in the annual reports of Canadian companies. Nevertheless, several prior risk disclosure studies used the sentence as the coding unit, for example, Abraham and Cox (2007), Beretta and Bozzolan (2004), Konishi and Ali (2007) and Linsley and Shrives (2005a; 2006).

Milne and Adler (1999, p. 243) argue that “sentences are far more reliable than any other unit of analysis”. Moreover, the use of sentences could be more efficient and less time-consuming, as well as “words can only be interpreted within the context of a sentence” (Linsley and Shrives, 2006, p. 393). Third, the study investigated all types of risk disclosed within annual reports of sample companies to give a full and rich picture of the companies’ total risk disclosures and facilitate comparability with other studies. Therefore, the study adopts the detailed categorization of risks developed by the ICAEW (1997) and used by Linsley and Shrives (2006) as shown in Appendix A. In addition, litigation risk was added as a subcategory of strategic risks. Finally, the different attributes of risk information were also considered in the coding process; whether it is quantitative or qualitative (nature of information), historical or future-oriented (time orientation) and positive (good) or negative (bad) risk information (the actual or potential impact).

5.2.2. The Coding Process The coding analysis was conducted following a number of prior studies (Abraham and Cox, 2007; Beretta and Bozzolan, 2004; Deumes, 2010; Linsley and Shrives, (2005a; 2006), Rajab and Handley-Schalcher, 2009; Mousa and Elamir, 2013; Woods and Reber (2003). A coding grid that has been established by Linsley and Shrives (2006) is adopted in this study as shown in Appendix C. A spreadsheet was created using Excel for each of the sample companies where columns represent the different risk categories and rows represent the attributes of risk information. The content analysis was done by the researcher in light of the factors mentioned above and the decisions rules. Following Beretta & Bozzolan (2004) and Linsley and Shrives 48

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

(2006), an initial coding of the content of five annual reports of companies not included in the sample to ensure familiarity with the coding rules and procedures. The annual reports of sample companies were obtained to examine and quantify risk information content within the management report and the notes to the accounts. Accordingly, any sentence which denotes risk information was highlighted and coded in terms of both the type of risk the sentence reports and the attributes of information. Then, the number of risk disclosures was counted to measure the total amount of risk disclosure for each company.

5.3. Reliability of Measurement According to Linsley and Shrives (2006), a major limitation of the content analysis approach is the subjectivity of individual coders as the coding depends on their perception of information. To overcome this problem, some prior studies, Abraham and Cox (2007), Lajili and Zeghal (2005) and Linsley and Shrives (2006; 2005a),

used one or more independent coders with relevant

experience to perform the content analysis. This may, however, distort the consistency of the coding process and research findings. While Mokhtar and Mellet (2013) performed the coding of risk information in annual reports twice to increase the accuracy of results. In this study, a set of predefined decision rules developed by Linsley and Shrives (2006) were employed to ensure the reliability of the coding process and research findings (Appendix B).

5.4. Measurement of Variables 5.4.1. Dependent Variable One of the major objectives of this study is to investigate the level of risk disclosure by the Egyptian listed companies. The level of CRD is the dependent variable which is measured by the

49

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

amount of risk information provided by the sample companies within the narrative sections of their annual reports; specifically in the management report and the notes to the accounts.

Consequently, the amount of risk information is, as discussed above, measured through content analysis of annual reports by the number of risk disclosures, which in turn is measured by the number of risk-related sentences.

5.4.2. Independent Variables Another major objective of this study is to identify the determinants of CRD by examining the relationship between the level of risk disclosure and a number of company-specific characteristics, namely company size, industry type, cross-listing, profitability and amount of reserves. Therefore, to test the hypotheses developed above, each of these independent variables was measured. First, the company size was measured by the natural logarithm of the total assets as at 31st December. Second, industry type was measured by assigning a distinctive number from 1 to 12 for each of the twelve industry sectors. Third, cross-listing is a dummy variable whereby 1 is given for cross-listed companies and 0 otherwise. Fourth, the return on equity (ROE) ratio was calculated for each company as a measure of the company profitability. Finally, reserves were measured by the amount of net income retained by each company, which appears on the balance sheet, to face any potential losses, crises or liabilities.

5.5. The Statistical Model In order to examine the relationship between the level of CRD (the dependent variable) and company-specific characteristics (the independent variables discussed above), the following regression model is employed:

50

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

CRD = β0 + β1X1 + β2X2 + β3X3 + β4X3 + β5X4 + ε

Where: CRD = the amount of risk disclosure β0 = the intercept X1 = company size X2 = industry type X3 = profitability X4 = cross listing X5 = amount of reserves ε = Error term

51

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

Chapter Six: Data Analysis and Results 6.1. Overall Analysis Table 6-1 displays the total number of risk disclosure sentences recorded for the sample companies. A total of 3449 risk disclosure sentences were identified for the sample companies after the analysis of their annual reports content. The table also gives the number of risk disclosure sentences under each of the six major categories of risk. It also shows the number of risk sentences for each of the different risk information characteristics. There are a greater number of risk disclosure sentences (1748) within the financial risks category representing over 50% of the total risk disclosures. This could imply that companies’ financial positions and results of operations were significantly affected by the volatility in interest rates, exchange rates and commodity prices during 2011.The findings also show a greater number of strategic risk disclosures (1100). This is also obvious within the sample annual reports as companies attempted to attribute the poor performance or the decrease in net profits in 2011 to some external factors related to the state of political instability in Egypt during 2011 and other global financial crises that affected a company activities. Furthermore, companies also focused on reporting upon operations risks and how they were affected by the lack of security during and after the revolution.

With regard to risk information characteristics, the table shows that companies disclosed more quantitative information on risks than qualitative information. This result contradicts with the largest body of prior CRD that highlight the lack of monetary risk disclosures within corporate reports. The results of the coding analysis also demonstrate that the number of future risk

52

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

disclosures is significantly greater than the number of past risk disclosures. Likewise, companies disclosed more good information about their future prospects and opportunities.

53

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

Non-financial risks

Information

Text Disclosure Sentence Characteristics

Financial

Operations

processing and

Integrity

risks

risks

Empowerment risks

technology risks

risks

Strategic risks

1

2

3

4

5

6

Total

Proportion (%)

Monetary/good/future

A

323

150

4

8

0

273

761

22.1

Monetary/bad/future

B

130

2

2

0

2

15

151

4.4

Monetary/neutral/future

C

617

1

5

0

0

36

659

19.1

Nonmonetary/good/future

D

56

70

19

20

2

175

342

9.9

Nonmonetary/bad/future

E

41

0

2

0

2

40

85

2.5

Nonmonetary/neutral/future

F

64

1

8

0

0

111

184

5.3

54

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

Monetary/good/past

G

175

93

33

1

3

153

467

13.5

Monetary/bad/past

H

122

39

2

0

1

121

285

8.3

Monetary/neutral/past

I

57

3

7

0

0

19

84

2.4

Nonmonetary/good/past

J

33

72

21

0

1

78

205

5.9

Nonmonetary/bad/past

K

3

4

0

0

1

75

83

2.4

Nonmonetary/neutral/past

L

14

6

3

0

0

4

27

0.8

1635

441

106

29

12

1100

3333

96.6

113

0

0

0

5

0

116

3.4

Total

1748

441

106

29

17

1100

3449

100

Proportion (%)

50.7

12.8

3.1

0.8

0.5

31.9

Subtotal

Nonmonetary/neutral/non-time specific risk management policy

M

Table 6-1

Aggregate risk disclosure of sample companies

55

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

6.2. Descriptive Analysis Table 6-2 presents the descriptive statistics for the first three hypotheses. It is clearly shown in the table that, for the sample companies, Egyptian listed companies disclose more quantitative risk information than qualitative information as the estimated mean of monetary (quantitaive) risk disclosures is 78.55 while the estimated mean of non-monetary (qualitative) risk disclosures is 33.68. The results also show that companies tend to disclose more future information on risks than past information as the estimated mean of future risk disclosures is 71.29 while the estimated mean of past risk disclosures. Likewise, Egyptian companies are willing to disclose greater amount of good risk disclosure than bad risk disclosure as the table shows that the estimated mean of good risk disclosures is 58.13 while the estimated mean of bad risk disclosures is 19.39.

Table 6-2: Descriptive statistics for pairs of variables in hypotheses 1-3

Paired Samples Statistics

Mean

Pair 1

Pair 2

Pair 3

N

Std. Deviation

Std. Error Mean

monetary

78.55

31

38.462

6.908

Nonmonetary

33.68

31

29.395

5.280

Good

58.13

31

36.397

6.537

Bad

19.39

31

14.521

2.608

Future

71.29

31

33.794

6.070

Past

36.74

31

23.816

4.277

56

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

For the first hypothesis where it is assumed that the number of non-monetary risk disclosures is greater than is the number of monetary risk disclosures. The decision is to reject the hypothesis if p-value is greater than the level of significance 0.05 which indicates that the difference between the two means is not significantly different from 0. As shown in Table 6- 3, there is a statistically significant difference between the number monetary and the number of non-monetary risk disclosures as determined by paired sample t-test (t = 5.945, difference in mean = 43.581, pvalue = 0.000). This implies that the average monetary risk disclosure is greater than average non-monetary risk disclosure (đ?œ‡đ?‘šđ?‘œđ?‘›đ?‘’đ?‘Ąđ?‘Žđ?‘&#x;đ?‘Ś = 78.55, đ?œ‡đ?‘›đ?‘œđ?‘›âˆ’đ?‘šđ?‘œđ?‘›đ?‘’đ?‘Ąđ?‘Žđ?‘&#x;đ?‘Ś = 33.68). This result contradicts the results of most prior risk disclosure studies which found that CRD made by companies is predominantly qualitative in nature (for example, Konishi and Ali (2007), Kongprajya (2010), Lajili and Zeghal (2005), Linsley and Shrives (2005a), Linsley and Shrives (2006), Mohobbot (2005). However, this could be due to a number of different factors. First, some of the sample companies reported net loss and others incurred a decrease in net profits in 2011 compared to the previous year. This may have led mangers to disclose more monetary risk information as they attempted to justify poor company performance and attribute the losses incurred or the decrease in profits to external factors and specifically to the state of political instability and uncertainty during and after the revolution.

57

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

Table 6-3: Output of SPSS for paired samples test

Paired Samples Test

Paired Differences

95% Confidence Interval of the Difference

Mean

Std. Deviation

Std. Error Mean

Lower

Upper

T

df

Sig. (2-tailed)

Pair 1

monetary – Nonmonetary

43.581

40.818

7.331

28.608

58.553

5.945

30

.000

Pair 2

Good – Bad

38.742

35.289

6.338

25.798

51.686

6.113

30

.000

Pair 3

Future – Past

34.548

27.731

4.981

24.377

44.720

6.937

30

.000

58

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

As also shown above in Table 6-3, there is a statistically significant difference between the number of good risk disclosures and the number of bad risk disclosures as determined by paired sample t-test (t = 6.113, difference in mean =38.742, p-value = 0.000) . This result suggests that the average number of sentences disclosing good risk information is greater than average number sentences of revealing bad risk information (đ?œ‡đ?‘”đ?‘œđ?‘œđ?‘‘ = 58.13, đ?œ‡đ?‘?đ?‘Žđ?‘‘ = 19.39). Such a result is consistent with the results of Kongprajya (2010) and Linsley & Shrives (2006) who found that the number of good risk disclosures is greater than the number of bad risk disclosures.

This can also be interpreted as companies sought to reassure investors and restore their confidence after through the disclosure of good news. Companies therefore disclosed information relating to their future prospectuses and plans for expansion as well as strategies developed to manage any potential losses or risks.

With regard to the time orientation of CRD, there is a statistically significant difference between the number of future risk disclosures and the number of past risk disclosures as determined by paired sample t-test shown above in Table 6-3 (t = 6.937, difference in mean =34.548, p-value = 0.000). This indicates that the average number of future risk disclosures is greater than average number of past risk disclosures (đ?œ‡đ?‘“đ?‘˘đ?‘Ąđ?‘˘đ?‘&#x;đ?‘’ = 71.29, đ?œ‡đ?‘?đ?‘Žđ?‘ đ?‘Ą = 36.74). This result confirms the result of Linsley and Shrives (2006) who found that the UK companies disclose more forwardlooking information on risks and uncertainties.

59

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

6.3. Determinants of CRD The multiple linear regression model between the level of CRD and company specific characteristics; company size, industry type, profitability, cross-listing and the amount of reserves a company holds, is displayed in Table 6-4. It thereby shows that the relationship between level of CRD and each of company size, industry type, profitability, cross-listing and the amount of reserves as explained below.

6.3.1. Company Size According to Table 6-4, one unit increase in company size raises the estimated amount of CRD by 13.356. This means that there is positive association between company size and the level of CRD. Moreover, the associated p-value is 0.045, which means that the relationship is also significant at 5% level of significance (i.e p-value = 0.045<0.05). Hence, the level of CRD is positively significantly associated with company size. This result is consistent with the results of the majority of prior risk disclosure research, for example, Beretta and Bozzolan, 2004, Hernandez-Madrigal, Aibar-Guzman and Blanko-Dopico, 2012, Linsley and Shrives, 2006 and Sigrid, Philip and Anneleen, (2009).

60

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

Table 6-4: Output of SPSS for multiple regression

Coefficientsa

Standardized Unstandardized Coefficients

Model

B

(Constant)

Coefficients

Std. Error

Beta

-280.068

131.334

Company size

13.356

6.324

Industry type

2.400

Profitability

Cross listing

Reserves

Correlations

T

Sig.

Zero-order

Partial

Part

-2.132

.043

.519

2.112

.045

.509

.389

.333

2.984

.157

.804

.429

.045

.159

.127

1.220

1.007

.224

1.211

.237

.183

.235

.191

94.081

49.470

.621

1.902

.069

.445

.356

.300

-1.919E-8

.000

-.589

-1.596

.123

.359

-.304

-.252

a. Dependent Variable: CRD

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

6.3.2. Industry Type The relationship between level of CRD and industry type is shown in Table 6-4 as the effect of industry type on the estimated amount of level of CRD is 2.40. This indicates that there is positive association between the level of CRD and industry type. Nevertheless, the associated pvalue is 0.429, which means that the relationship is insignificant at 5% level of significance (i.e p-value = 0.429>0.05). Therefore, there is a positive, generally insignificant, relationship between industry type and the level of CRD by Egyptian companies. This result confirms the result of Aljifri and Hussainey (2007) who found an insignificant relationship between industry type and the amount of forward-looking information disclosed. However, the result disagrees with the results of a number of CRD studies that found a significant relationship between the industry type and the extent of CRD. 6.3.3. Profitability With regard to the relationship between level of CRD and profitability, Table 6-4 shows that one unit increase in profitability raises the estimated amount of CRD by 1.22. This means that there is positive association between the level of CRD and profitability. At the same time, the associated p-value is 0.429, which means that the relationship is insignificant at 5% level of significance (i.e p-value = 0.237>0.05). Accordingly, the relationship between profitability and the level of CRD is insignificant. Most prior studies found a negative association between profitability and the level of CRD (Miihkinen, 2010; Sigrid, Philip and Anneleen 2009; Vandemele, Vergauwen and Michiels, 2009). Aljifri and Hussainey (2007) found that highly profitable companies provide more forward-looking information. Similarly, Mousa and Elamir (2013) found that profitability and the level of CRD are significantly correlated.

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

6.3.4. Cross-listing Table 6-4 shows the relationship between level of CRD and cross-listing represented by the effect of cross-listing on the estimated amount CRD, which is 94.081. This means that there is positive association between the level of CRD and cross-listing. However, the associated p-value is 0.069, which means that the association is insignificant at 5% level of significance (i.e p-value = 0.069>0.05). Hence, there is a positive and insignificant association between cross-listing and the amount of risk information a company discloses. This result contrasts with the results of some previous studies that revealed that Cross-listing and CRD level are significantly positively correlated ((Miihkinen, 2010; Rajab, 2009; Rajab and Handley-Schachler, 2009).

6.3.5. Amount of reserves Regarding the relationship between level of CRD and reserves, Table 6-4 shows that one unit increase in the amount of reserves reduces the estimated amount of CRD by -1.919X10-8. This means that there is a negative association between the level of CRD and the amount of reserves a company holds. However, the associated p-value is 0.123, which means that this relationship is insignificant at 5% level of significance (i.e p-value = 0.123>0.05). Hence, the relationship between the amount of reserves and the extent of CRD is negative and insignificant. This result confirms the findings of Hassan (2009). However, little research has investigated the impact of reserves on the extent of CRD. Therefore, the relationship between CRD level and reserves needs further investigation (Hassan, 2009).

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

Chapter Seven: Conclusion, Limitations and Future Research This study attempts to explore the attributes of narrative risk disclosure within the annual reports of Egyptian listed companies, specifically within the management report and the notes to the accounts. The study also examines the association between the level of CRD and a number of firm-specific characteristics, namely company size, industry type, profitability, cross-listing and the amount of reserves a company holds. The research findings show that companies report more monetary, future and good information on risks. The results also reveal that company size is positively significantly correlated with the level of CRD. Whereas industry type, profitability and cross-listing are positively but insignificantly associated with the amount of risk information.

Moreover, the amount of reserves is negatively, however insignificantly, correlated with the extent of CRD. This study contributes to a growing body of literature on CRD by providing an insight into risk reporting practices in the emerging capital market of Egypt. The study has, however, a number of limitations. First, the study investigates CRD within the annual reports only. Therefore, the results may not reflect the full picture of a companyâ&#x20AC;&#x2122;s risk exposure and disclosure. Second, the sample size is relatively small compared to the population size due to the time constraints.

Finally, the subjectivity of the content analysis method also represents a major limitation of this study may also distort the research findings.

Further research could also be conducted to investigate other issues related to CRD. First, while the vast majority of prior research has emphasized examining the quantity of CRD, future research could examine the quality of risk information disclosed. Second, it might be relevant to examine the effect of other factors and corporate characteristics on CRD level and practices such

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

as Corporate Governance characteristics, company level of risk and ownership structure. Third, investigating risk reporting practices of small and medium-sized companies listed on the Nilex; the Egyptian exchange market for small and medium-sized companies. Fourth, Cross-country studies could be undertaken to identify the differences in CRD practices among different countries and the various drivers of this type of disclosure. Fifth, conducting longitudinal studies to examine the impact of introducing the recently adopted EAS and CG rules on the nature and volume of risk information. Finally, investigating the views of investors, regulators, mangers and preparers of annual reports regarding CRD.

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

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Appendices Appendix A: Risk disclosure categories

Financial risk

Interest rate Exchange rate Commodity Liquidity Credit

Operations risk

Customer satisfaction Product development Efficiency and performance Sourcing Stock obsolescence and shrinkage Product and service failure Environmental Health and safety Brand name erosion

Empowerment risk

Leadership and management Outsourcing Performance incentives Change readiness Communications

Information processing and technology risk

Integrity 79

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

Access Availability Infrastructure

Integrity risk

Management and employee fraud Illegal acts Reputation

Strategic risk

Environmental scan Industry Business portfolio Competitors Pricing Valuation Planning Life cycle Performance measurement Regulatory Sovereign and political Litigation

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Appendix B: Decision rules for risk disclosures 

To identify risk disclosures a broad definition of risk is to be adopted as explained below.



Sentences are to be coded as risk disclosures if the reader is informed of any opportunity or prospect, or of any hazard, danger, harm, threat or exposure, that has already impacted upon the company or may impact upon the company in the future or of the management of any such opportunity, prospect, hazard, harm, threat or exposure.



The risk definition just stated shall be interpreted such that ‘good’ and ‘bad’ ‘risks’ and ‘uncertainties’ will be deemed to be contained within the definition.



Although the definition of risk is broad, disclosures must be specifically stated; they cannot be implied.



The risk disclosures shall be classified according to the grid in Appendix C, and by reference to the Appendix A risk categories.



Sentences of general policy concerning internal control and risk management systems shall be classified ‘M5’-‘non-monetary/neutral/non-time specific statements of

risk

management policy-integrity risk’. 

Sentences of general policy concerning financial risk management shall be classified ‘M1’-‘non-monetary/neutral/non-time specific statements of risk management policyfinancial risk’.



Monetary risk disclosures are those risk disclosures that either disclose directly the financial impact of a risk or disclose sufficient information to enable the reader to calculate the financial impact of a risk.



If a sentence has more than one possible classification, the information will be classified into the category that is most emphasised within the sentence.

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

ď&#x201A;ˇ

Tables (quantitative and qualitative) that provide risk information should be interpreted as one line equals one sentence and classified accordingly.

ď&#x201A;ˇ

Any disclosure that is repeated shall be recorded as a risk disclosure sentence each time it is discussed.

ď&#x201A;ˇ

If a disclosure is too vague in its reference to risk, then it shall not be recorded as a risk disclosure.

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Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

Appendix C: CRD coding grid

Financial risks

Non-financial risks

Operations

Empowerment

Information

risks

risks

processing and

technology risks

Text Disclosures Sentence

Characteristics

Monetary/good news/future

A

Monetary/bad news/future

B

Monetary/neutral/future

C

Non-monetary/good news/future

D

Non-monetary/bad news/future

E

Non-monetary/neutral/future

F

83

Total

Integrity risks

Strategic risks

Proportion %

Corporate risk disclosure: A content analysis of the annual reports of Egyptian listed companies

Monetary/good news/past

G

Monetary/bad news/past

H

Monetary/neutral/past

I

Non-monetary/good news/past

J

Non-monetary/bad news/past

K

Non-monetary/neutral/past

L

Sub-total

Non-monetary/neutral/non-time

M

specific statements of risk management policy

Total

Proportion

84