When are earnings informative? Effect of stock liquidity on value of reported earnings in an emerging market: evidence from Egypt

Abstract

Purpose

This paper aims to examine the impact of stock market liquidity on the value of reported earnings in Egypt, proxied by the earnings–return relationship, during the period between 2006 and 2015.

Design/methodology/approach

To achieve this objective, this paper uses a sample including all active firms listed on the Egyptian Stock Exchange. This study employs multivariate panel data regression analysis with fixed effects estimated using robust standard errors, and control for other variables. All financial, accounting and stock market data are collected from the Thomson Reuters Worldscope and Datastream databases.

Findings

The empirical results report a significant positive relation between liquidity and earnings informativeness. This study argues that in environments with high information asymmetries, reported earnings are informative conditional on stock liquidity. All results remain valid when using heteroscedasticity-robust standard errors clustered across firms, alternative measures of liquidity, sub-groups of different sizes and estimating quantile regressions.

Originality/value

This paper identifies stock price liquidity as a significant determinant of stock price informativeness of earnings in Egypt. In particular, stock liquidity reduces agency conflicts and information asymmetries between managers and market investors, and thereby decreases managerial incentives to misreport earnings. This consequently enhances the quality of reported earnings and the informativeness of prices.

Citation

ElBannan, M.A. and Farooq, O. (2019), "When are earnings informative? Effect of stock liquidity on value of reported earnings in an emerging market: evidence from Egypt", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 12 No. 3, pp. 388-406. https://doi.org/10.1108/IMEFM-08-2018-0270