Dr. Heba Besheir Eltokhy Abd Elfattah :: Publications:

1.Research Problem: The decision to hold cash is one of the most important financial decisions through which the company's continuity, survival, and ability to face financial crises can be assessed. The mo-tives for this decision depend on several determinants. One study indicated that the deter-minants of cash holding are related to three main aspects: the company’s operational charac-teristics (including company size, financial leverage, the size of investment spending, profits and their distributions), in addition to governance mechanisms and the quality of financial reports. Cash holding is one of the most important issues and strategies for corporate finan-cial management, as it relates not only to the operation and development of the company, but also to corporate governance and the institutional environment. Several theories have emerged to explain the motives for holding cash. The Trade-off Theo-ry suggests that a company holds cash either to reduce transaction costs, as the cost of ex-ternal financing may be higher than holding available cash, or as a precautionary measure to avoid a cash deficit and to try to take advantage of profitable investment opportunities in the future. Pecking order theory assumes that there is no optimal level of cash holding, and in light of the high level of information asymmetry, the cost of external financing is high, so companies tend to hold cash as a low-cost source of financing. While the free cash flow theory suggests that managers, as agents of shareholders, should work to enhance share-holders' wealth, some managers may have a motive to hold cash to increase the amount of assets under their control and gain discretionary power over the firm's financing and invest-ment decisions in a way that serves their personal interests. This theory emphasizes that re-tained cash increases management's freedom of action. Agency theory confirms this inter-pretation. According to this theory, managers may prefer to hold cash assets to reduce the risks of the firm and increase their power to exercise discretion over such assets. Cash assets thus provide managers with the ability to achieve their goals by relying on those assets to un-dertake projects that are unprofitable or of low value to shareholders, but that serve their personal interests. In light of the above, it becomes clear that agency problems are an important determinant of cash holding in companies. Information asymmetry drives companies to increase their level of cash retention due to the high cost of external financing, which may result in the company losing profitable investment opportunities, thus creating the problem of adverse selection. Furthermore, the accumulation of cash creates the opportunity for managers to use it to achieve their personal interests, which creates the problem of moral hazard. On the other hand, management may engage in many other practices that would achieve self-interest for the company's management, even if achieving those benefits conflicts with the interests of other stakeholders. These practices are known as earnings management practices, which arise also from agency problems and conflicts of interest between manage-ment and other stakeholders in the company. Many studies have shown a relationship between the problem of information asymmetry and earnings management. Management has more information than other stakeholders. In the face of a conflict of interest, management may use this information to achieve its own inter-ests through earnings management practices. In addition, the problem of information asym-metry and the emergence of the adverse selection problem is related to the difference in the quantity and quality of information available to management compared to the quantity and quality of information available to other parties. This prevents these parties from verifying the decisions made by management, which leads to their inability to determine whether the performance results achieved by management represent the appropriate choice and achieve their interests or not. Corporate governance mechanisms are considered among the most important factors in mitigating agency problems and activating the oversight role of stakeholders over manage-ment's actions and decisions. One study indicated that the quality of corporate governance is of paramount importance in avoiding agency problems. One of the objectives of effective in-ternal governance is ensuring appropriate levels of cash holding, as corporate governance mechanisms play a fundamental role in determining an organization's cash policy. Mean-while, weak corporate governance results in increased managers' tendency to retain cash, which may be an area for opportunistic management behaviour. Some emphasize that corpo-rate governance mechanisms play an important role in monitoring the performance and de-cisions of a company's management by overseeing and monitoring various administrative decisions and limiting opportunistic managerial behaviour, which appears through many practices, such as earnings management and the ineffectiveness of decision-making regard-ing cash retention. The audit committee is considered one of the most important governance mechanisms that works to establish and maintain a strong regulatory system and environment within the com-pany. This role has gained increased attention among all stakeholders following the financial collapses of several global companies. Some believe that good corporate governance is linked to an effective audit committee. One of the most important developments related to the audit committee is the need to issue reports on the committee's work. This report is the means by which stakeholders can learn about the outcome of the audit committee's work. It is expected that this report will provide additional explanatory power to the information contained in the financial statements and other reports, thus contributing to reducing the level of information asymmetry. It will also enhance the oversight of managers' investment decisions, thereby limiting managers' oppor-tunities to misuse cash and limiting opportunistic management behaviour. Therefore, reducing the problem of information asymmetry through disclosures provided by the audit committee report, which leads to increased information transparency and reduced stakeholder concerns, makes the company more able to increase its reliance on external sources of financing for its investments. Consequently, the company does not hold large amounts of cash, which creates an opportunity for management to engage in earnings man-agement practices on the one hand, and leads to the company losing investment opportuni-ties on the other hand. By studying the reality of the audit committee report in the Egyptian environment, it be-comes clear that there is no unified model for the form and content of the report, which may result in differences in the level and tone of accounting disclosure in that report. The tone of accounting disclosure refers to how companies’ performance and future trends are described positively or negatively in financial reports. The difference in that tone (positive or negative) may affect the views and decisions of different stakeholders. Analyzing the tone used in ac-counting disclosure and using it strategically is considered an important matter, as the nature of the tone used in accounting disclosure can be part of the disclosure strategy within the company, which is reflected in the perceptions and decisions of stakeholders. Based on the above, the research problem is to study the impact of the tone of disclosure in the audit committee report on the level of cash holding and earnings management in Egyp-tian companies listed on the stock exchange, which can be formulated through the following main question: Does the tone of disclosure in the audit committee's report affect the level of cash hold-ing and earnings management in Egyptian companies listed on the stock exchange? The following questions are derived from this question: • Is there a difference in the level of disclosure in the audit committee report among Egyptian companies listed on the stock exchange? • What is the impact of the disclosure tone in the audit committee report on the level of cash holding in Egyptian companies listed on the stock exchange? • What is the impact of the disclosure tone in the audit committee report on earnings management in Egyptian companies listed on the stock exchange? 2. Research Objectives: The primary objective of the study is to study and analyze the impact of the tone of disclo-sure in the audit committee's report on the level of cash holding and earnings management in Egyptian companies listed on the stock exchange. From this objective, the following sub-objectives are derived: • Study and analyze the nature of the tone of disclosure in the audit committee's report for Egyptian companies listed on the stock exchange. • Study the impact of the tone of disclosure in the audit committee's report on the level of cash holding in Egyptian companies listed on the stock exchange. • Study the impact of the tone of disclosure in the audit committee's report on earnings management in Egyptian companies listed on the stock exchange. 3. Research Importance: The importance of the research lies in the following points: • The importance of the cash holding decision, which impacts the company's profitabil-ity on the one hand, and the company's ability to meet its obligations on the other. Therefore, the importance of the research is demonstrated by its focus on one of the determinants or factors that may influence this decision and work to control the level of cash rholding and achieve its optimal level. • The importance of exploring ways to limit earnings management practices, which re-sult in numerous negative effects that negatively impact the efficiency of financial markets and increase the cost of equity and external financing, which negatively im-pacts the company's current and future performance. • The research provides applied evidence from the Egyptian context on the impact of the tone of disclosure in the audit committee's report on both the level of cash hold-ing and earnings management. This has not received sufficient attention from previ-ous studies, especially in the Egyptian business environment. To the best of the re-searchers' knowledge, this research is among the first in the Egyptian context to ad-dress this topic. 4. Scope of the Research: The applied aspect of the current study is limited to non-financial joint-stock companies listed on the Egyptian Stock Exchange (EGX100) during the period from 2018 to 2021. The study does not extend to other companies belonging to the financial sectors, as it excludes companies listed in the banking and financial services sectors due to their unique nature, subject to legal and regulatory requirements that differ from those of other sectors. The empirical segment of this study focuses on non-financial joint-stock companies listed on the Egyptian Exchange, specifically those included in the EGX100 index during the period 2018–2021. The study excludes companies in the banking and financial services sectors due to their unique regulatory requirements and distinct operational nature, which differ from other sectors. This scope ensures a more uniform comparison across the sampled firms and sectors. 5. Research Hypotheses: In light of the research objectives and questions, the research hypotheses were formulated as follows: H 1: There is a difference in the tone of disclosure in the audit committee report among joint-stock companies listed on the Egyptian Stock Exchange. H 2: There is a statistically significant relationship between the tone of disclosure in the audit committee report and the level of cash holding. H 3: There is a statistically significant relationship between the tone of disclosure in the audit committee report and earnings management. 6. Research plan: Based on the importance of the research, achieving its objectives and answering its research questions, the research was completed as follows: The first section deals with the general framework of the research, the second section presents the theoretical conceptual frame-work of the study, while the third section deals with previous studies and the development of the research hypotheses, the fourth section presents the design of the applied study and the construction of study models, the fifth section deals with the analysis and discussion of the results of the applied study and testing the hypotheses, and finally the sixth section deals with the results, recommendations and future research directions. 7. Results: The research reached a set of findings, the most important of which can be presented as fol-lows: • The tone of disclosure in the audit committee report refers to the positive tone (good news) or negative tone (bad news) that audit committee members choose when drafting their report. This tone is determined in light of the company's financial per-formance and the committee's work results, which may influence the decisions of the company's stakeholders. • Disclosure in the audit committee report for the study sample included good news (positive tone) more than it included bad news (negative tone), as the average posi-tive tone during the study years was (59.5%) compared to (38.8%) for the negative tone, and this is consistent with some studies conducted in the Egyptian environment and some other studies conducted in different environments. • There is a discrepancy between the companies studied regarding the tone of disclo-sure in the audit committee report. This may be due to the different characteristics of companies within each of the sectors comprising the study sample, on the one hand, in addition to the lack of a unified framework that companies adhere to when disclos-ing the audit committee report. • There is a relationship between the tone of disclosure in the audit committee report and the level of cash holding, as the level of cash holding decreases when a positive disclosure tone is used and increases when a negative tone is used. The positive tone in the audit committee report increases the confidence of stakeholders in the compa-ny and, with it, increases the company's ability to obtain funds at an appropriate cost, which is reflected in the level of cash holding. • There is a relationship between the tone of disclosure in the audit committee report and the earnings management practices of the sample companies, as the use of a positive tone in the audit committee report is associated with a decrease in earnings management practices, while those practices increase in the presence of a negative tone in the audit committee report. 8. Recommendations: In light of the findings, the researchers recommend the following: - Increase corporate and stakeholder awareness of the nature and importance of the tone used (positive or negative) in financial reporting and the impact of this tone on stakeholder decisions, which is reflected in the company's financial performance, management decisions, and behaviour. - Directing companies' attention to the importance of accounting disclosure of the audit committee's report, paying attention to the tone used in preparing it, the importance of the information it provides, and its role in gaining the trust of stakeholders, which is reflected in the company's financial and administrative capacity and its survival in the business environ-ment. - Directing the attention of the Financial Regulatory Authority and relevant authorities to the need to establish a unified framework for accounting disclosure of the audit committee's re-port and to specify the minimum level of information that the report must include, which will serve its role in reducing information asymmetry and increasing stakeholder confidence in the company, in addition to reducing the disparity between companies in this regard.