1. Research Problem:
In light of the continuous changes surrounding the business environment and increasing un-certainty about an entity’s future performance, in addition to the growing reliance on finan-cial instruments and expanding international transactions, information related to the risks surrounding the entity, the methods of managing those risks, and their impact on perfor-mance has become among the most important information for users of financial statements and reports. There is a need for more appropriate and high-quality risk information.
The importance of accounting risk disclosure is also evident in its role in enhancing capital market efficiency. Such disclosure helps investors estimate the magnitude and timing of a company's future cash flows, assess the sustainability of its operations, and predict stock re-turns, which in turn contributes to more efficient investment decisions.
On the other hand, managerial ability has recently been highlighted in the accounting litera-ture as one of the most important characteristics of managers. It refers to the extent to which managers are able to understand the company’s economic situation and industry conditions, as well as their ability to accurately evaluate future opportunities and the company’s per-formance. Managers with high ability possess experience and skills that qualify them to make sound decisions that contribute to achieving economic efficiency.
Managerial ability can affect the optimal use and allocation of resources. Managers with a high level of ability make decisions that maximize the company's value. Different managerial personalities lead to different decisions for the company—whether in investment, financial, or organizational strategies. Managerial characteristics, especially managerial ability, have attracted researchers’ attention, particularly after the development of a managerial ability measure by Demerjian et al. (2012), which has been used in most studies examining the im-pact of managerial ability on various accounting aspects.
Previous studies indicate that the impact of managerial ability on a company’s outcomes—and thereby on the quality of accounting disclosure—is a subject of debate regarding wheth-er such an effect exists or not, or whether this ability can be used to achieve managers’ per-sonal benefits.
Many studies have confirmed that managers with high managerial ability have better knowledge and understanding of the nature of the company’s business and associated eco-nomic changes, and greater understanding and application of accounting standards and in-ternal control procedures. This leads to an improved information environment for the com-pany, and thus improves the quality of accounting disclosures.
Conversely, some other studies believe that highly capable managers can exploit their knowledge and skills opportunistically to serve their personal interests at the expense of shareholders and other stakeholders. They may engage in earnings management practices or issue obscure financial reports that affect the readability of financial statements, thereby re-ducing the quality of accounting disclosure.
Meanwhile, others have pointed out that the impact of managerial ability on a company’s performance might be limited, and that results are largely attributable to the company’s own characteristics. Accordingly, the influence of managers on the company’s information envi-ronment could be limited—and thus the quality of accounting disclosure may also be limited.
Applying this concept to risk disclosure (as a subset of accounting disclosure), it can be said that managers with high managerial ability are able to anticipate future changes in the com-pany’s economic environment and prepare reliable estimates of future risks. They can meas-ure the timing and economic returns associated with the company’s investments, obtain more accurate information about expected investment opportunities, and provide better risk management and forecasting of their effects on performance. These capabilities, in turn, improve the quality of risk disclosure.
However, high managerial ability may also, under certain circumstances, lead to lower risk disclosure quality if managers exploit their knowledge and skills opportunistically for personal gain. This can occur by controlling the quantity and quality of risk information disclosed, cre-ating ambiguity in risk disclosures that affects the readability of financial reports, or by man-aging the tone of risk disclosures in narrative reporting.
Based on the above, it is clear that prior studies on the relationship between managerial ability and the quality of risk disclosure have not reached conclusive results regarding the im-pact of managerial ability on the quality of risk disclosure, nor on the extent of its impact on the value relevance for accounting information. This provided motivation for the current study to offer empirical evidence from the Egyptian context on the effect of managerial abil-ity on both risk disclosure quality and the value relevance for accounting information, as well as to examine the impact of the interaction between managerial ability and risk disclosure quality on the value relevance for accounting information.
Therefore, the research problem can be expressed in the following main question:
What is the impact of the relationship between managerial ability and the quality of risk disclosure on the value relevance for accounting information in Egyptian companies?
From this main question, the following sub-questions arise:
• What is the impact of managerial ability on the quality of risk disclosure?
• What is the impact of managerial ability on the value relevance for accounting in-formation?
• What is the impact of the quality of risk disclosure on the value relevance for ac-counting information?
• What is the impact of the relationship between managerial ability and the quality of risk disclosure on the value relevance for accounting information?
2. Research Objectives:
The main objective of this research is to analyze the relationship between managerial ability and the quality of risk disclosure, and to investigate its impact on the value relevance for ac-counting information for a sample of Egyptian companies listed in the EGX 100 index during the period 2018–2020.
To achieve this primary objective, the following sub-objectives are addressed:
• Examine the impact of managerial ability on the quality of accounting risk disclosure.
• Examine the impact of managerial ability on the value relevance for accounting in-formation.
• Examine the impact of the quality of risk disclosure on the value relevance for ac-counting information.
• Examine the impact of the interaction between managerial ability and the quality of risk disclosure on the value relevance for accounting information.
3.Research Importance:
The importance of this research stems from providing empirical evidence in the Egyptian context regarding the impact of managerial ability on both the quality of risk disclosure and the value relevance for accounting information. It also examines the impact of the relation-ship between managerial ability and the quality of risk disclosure on the value relevance for accounting information.
The findings of this study may be of interest to boards of directors, stakeholders, accounting standard-setters, and regulatory bodies. Analyzing managerial ability highlights which man-agers are most capable of understanding and flexibly applying accounting standards, making better use of available resources, and influencing the disclosure of financial and non-financial risks. These factors collectively can influence the value relevance for accounting information.
4.Research Limitations:
This research is limited to examining the impact of the relationship between managerial abil-ity and the quality of risk disclosure quality on the value relevance for accounting infor-mation in companies listed on the Egyptian Exchange’s EGX 100 index over the period 2018–2020. Financial companies and banks are excluded due to their unique nature and distinct legal and regulatory frameworks. Furthermore, the generalizability of the findings is subject to the inherent limitations of the applied study.
5.Research Hypotheses:
In light of the research objectives and questions, the following hypotheses were formulated:
H1: There is a statistically significant relationship between managerial ability and the quality of risk disclosure.
H2: There is a statistically significant relationship between managerial ability and the value relevance for accounting information.
H3: There is a statistically significant relationship between the quality of risk disclosure and the value relevance for accounting information.
H4: There is a statistically significant impact of the interaction between managerial abil-ity and the quality of risk disclosure on the value relevance for accounting information.
6.Research Plan:
Based on the importance of the research and to achieve its objectives and answer its ques-tions, the structure of the research is divided as follows: Section One presents the general framework of the research. Section Two addresses the conceptual theoretical framework. Section Three reviews the previous studies and the development of the hypotheses. Section Four covers the design of the applied study and the construction of the study models. Section Five includes the analysis and discussion of the study’s results and the hypothesis testing. Fi-nally, Section Six presents the conclusions, recommendations, and directions for future re-search.
7.Results:
The research reached a set of findings, the most important of which can be summarized as follows:
- The quality of risk disclosure among the sample companies declined during the period cov-ered by the study, whether in terms of the quantity of disclosure, the coverage of financial and non-financial risks, or the availability of quality characteristics in the information related to the disclosed risks. However, there was an improvement in the quality level over the years of the study.
- The managerial ability of managers is linked to a positive and significant correlation with the quality of risk disclosure, as the correlation coefficient sign was positive and the signifi-cance level was less than (0.01), which means that the higher the degree of managerial abil-ity, the better the quality of risk disclosure, this finding supported the first hypothesis.
- There is a positive, non-statistically significant correlation between managerial ability and the value relevance for accounting information, as the correlation coefficient is positive and the significance level is greater than (0.01), which means that there is no direct relationship between managerial ability and the value relevance for accounting information, this finding supported the second hypothesis.
- There is a statistically significant direct correlation between the quality of risk disclosure and the value relevance for accounting information, as the correlation coefficient is positive and the significance level is less than (0.01), which means that the higher the quality of risk disclosure, the better the value relevance for accounting information, this finding supported the third hypothesis.
- There is a strong, statistically significant, direct correlation between the interactive effect of managerial ability, the quality of risk disclosure, and the value relevance for accounting in-formation. This means that the availability of managers with high managerial capacity leads to improved quality of risk disclosure, which is reflected in improved value relevance for ac-counting information. this finding supported the fourth hypothesis.
8. Recommendations:
In light of the findings, the researchers recommend the following:
- Companies seeking to maximize revenues and achieve competitive advantages should focus on attracting managers with high managerial capabilities and provide the necessary means to continually develop and enhance their skills, as this will yield numerous benefits that will impact the company's current and future performance.
- Directing the attention of the bodies responsible for regulating the accounting and auditing profession at the international and local levels to provide the necessary guidelines and standards to regulate accounting disclosure of risks of all types, financial and non-financial, and to define the auditor’s responsibility for those risks, leading to improving the quality of disclosure thereof.
- The researchers recommend that companies pay attention to the quality of risk disclosure by providing adequate and appropriate disclosure so that the amount of information dis-closed is sufficient to meet the needs of its users, covers all risks to which the company is ex-posed, and meets the characteristics of information quality. They also recommend disclosing the procedures followed to manage these risks, which contributes to improving the transpar-ency of financial reports and makes them more suitable to the needs of their users and more reliable.
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