The Effect of Endogeneity on the Relationship between Disclosure Level and Cost of Equity Capital: The Egyptian Case

This study investigates the impact of disclosure levels on the cost of equity capital (COE) in Egypt. Using a comprehensive dataset that complies with the 2016 Egyptian accounting standards and includes data from 73 companies spanning 2008 to 2016, we apply the System Generalized Method of Moments to effectively control for endogeneity in our analysis. This methodology enables us to robustly isolate the causal effects of disclosure practices on COE, ensuring that our findings reflect true impact rather than mere associations. To estimate COE, we utilize three established methods: the Capital Asset Pricing Model, the Fama and French three-factor model, and the Industry Adjusted Earnings/Price Ratio. Our findings reveal a complex relationship where voluntary disclosure is inversely related to COE, suggesting that increased transparency may reduce capital costs. Conversely, mandatory disclosure is positively correlated with COE, indicating potential inefficiencies or over-compliance costs. These insights are crucial for regulators and investors in emerging markets, as they highlight the benefits of voluntary disclosure and suggest areas for improving mandatory reporting practices. Enhanced understanding of these dynamics can lead to more informed policymaking and investment strategies that bolster market strength and attract global investment.