Exploring credibility of financial reporting : the perceptions of financial analysts and implications for investor relations function in Egyptian listed companies

• Main Author: Hussien, Mostafa Mahmoud Mohamed
• Published: University of Essex 2013
• Subjects: 332.632042
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.605178

This research project explores how the credibility of financial reporting communication (CFRC) is perceived by the receiver i.e. financial analysts in Egyptian capital market (ECM) and investigates the credibility consequences in financial reporting communication. The study mainly focuses on exploring non-quantitative factors since their impact on credibility perceptions of financial analysts has not been sufficiently discussed in the financial reporting literature. Furthermore, the study also aims to explore to the role of the Egyptian Investor Relations managers' activities in general and regarding credibility in particular. Within this context, an attempt to suggest a credibility framework for financial reporting communication has been made since the perception of credibility is a subjective concept that cannot be quantified. In this thesis, the credibility components are categorised into dimensions of the CFRC perception and into factors relating to context that affect the perception of these dimensions. Following the socio-cultural perspective that treats credibility as a perceptual variable, credibility here is not an objective property of a source or a piece of information but rather a subjective perception on the part of the information receiver. This perspective underlines the receiver's perceptions of credibility rather than the objective credibility of a source or a piece of information (Flanagin and Metzger, 2008; Gradwell, 2004). A review is made of the relevant literature on the role of financial analysts, Investor Relations function, and credibility in the financial reporting and communication disciplines. An investigation of the legal and regulatory framework governing company communications with investors and financial analysts in Egypt is carried out. The credibility theoretical framework is based on the Pornpitakpan's (2004) approach for source credibility theory and credibility assessment framework presented by Hilligoss and Rieh (2008). Actually, this framework is modified to be implemented in the financial reporting communication in the ECM. The lack of previous empirical research on the role of the receivers' perceptions of credibility in capital market communications suggests the choice of an interpretative paradigm. The benefit of an interpretative perspective is that it helps to enrich the understanding of complex, ambiguous, and paradoxical phenomena (Lewis and Grimes, 1999). The data is collected through semi-structured interviews with twenty financial analysts and eight Investor Relations managers. The research site is companies registered in the Egyptian Stock Exchange (ESX). After that, the collected data has been summarised by applying the pattern coding technique suggested by Miles and Huberman (1994). To analyse the data, the pattern matching technique suggested by Trochim (1999) has been employed to compare the results of interviews and the patterns or categories from the CFRC's theoretical framework. The main findings from this thesis can be summarised as follows. First, credibility in financial reporting communication is a receiver-based construct, a multidimensional construct and a contextual construct. Second, the credibility dimensions and factors affecting the perception of these dimensions are found to be six dimensions and factors, namely, sender dimensions, disclosure dimensions, channel dimensions, receiver dimensions, destination dimensions and context factors. Finally, there are many challenges for Investor Relations functions in general and for enhancing credibility in particular in the Egyptian context. This study contributes to the credibility of financial reporting literature by indicating the following. Firstly, credibility perception represents an important factor in financial reporting communication. Secondly, this study provides empirical evidence of the credibility dimensions in financial reporting communication. Thirdly, this study also provides empirical evidence of the factors that affect the perception of credibility dimensions in financial reporting communication. Finally, this study proposes a credibility framework for financial reporting communication between managers and financial analysts. This study also contributes to Investor Relations practices by attempting to call the attention of Investor Relations scholars to the area of communication through studying the credibility of communication and its effects on this communication process. In addition, it contributes to theory by extending the constructionist model of source credibility theory in financial reporting communication. The key limitation for this thesis is that the findings are limited to generalisation as it is a qualitative exploratory study limited to financial analysts and Investor Relations managers within ECM. Although generalisation of the findings is the main limitation for most qualitative studies, the possibility of making generalisations for the theoretical framework is one of the main advantages of qualitative studies to overcome this limitation. As indicated earlier the theoretical framework in this thesis is based on the constructionist model of source credibility theory. Finally, the implications for future research arising from this thesis can be applied to research in the following areas. Firstly, this study can be applied to investigate how investors or shareholders perceive the dimensions of credibility in financial reporting communication with managers and or financial analysts. Secondly, it can also be deployed to investigate to what extent the internet reporting or using internet as a channel of communication is perceived as credible method of communication. The findings of these suggested studies may be helpful to build a general model of credibility which would be applied in different business communication.