Do Informativeness of Co-Integrated Financial Fundamentals Contribute to Shareholder Value in a Transitional Market? Evidence from Egypt

Abstract

This study examines the informativeness of fundamental financial information to three levels of market-to-book (MB) ratio: high MB firms, medium MB firms, and low MB firms. In general, the results indicate that the financial ratios (as co-integrated financial information) are relatively quite informative to the three shareholder value classes. This is considered a merit of this study since it is the first study in a transitional market that addresses how to support shareholder value, which is one of the fundamental targets of the investment in financial information. The results regarding the fundamental analysis indicate that (a) in the low MB firms, the investors are concerned with the long-term horizon, (b) in the medium MB firms, the operating and total expenses are regarded as a capital investment, (c) in the high MB firms, the trend is to finance operations using equity rather than debt financing, (d) profitability affects low MB firms only rather than high and medium firms, (e) in the high and medium MB firms, investors do not regard the elements related to firm's operations, (f) in the low MB firms, investors are concerned with the effects of capital structure although the results show that dividends have a reverse effect on firm's market value.

Keywords: Financial ratios, Informativeness, Shareholder value, Egypt

JEL Classification: G30, M41, N27, P34