Accounting information in thin and emerging capital markets. (Research Notes).

This paper investigates the role of accounting in the debt market in Egypt. The World Bank and many of the U. S. A. analysts consider Egypt one of the promising emerging capital markets. This examination covers two dimensions: (a) the use of accounting information in valuing industrial debt

issues; and (b) the utilization of accounting information in debt contracting. Prior research in developed markets (for example, U. S. A.) provides evidence that accounting measures of liquidity, capital structure, and profitability are associated with industrial bond values and yields. Prior studies conclude also that the majority of bond issues and private lending agreements use restrictive debt covenants that are based on accounting ratios and measures. This paper examines whether these relationships exist in the debt market in Egypt.

The investigation is based on three research mechanisms: (a) statistical analysis of archival data on bond prices and yields in relation to issuing firms' financial measures of liquidity and profitability along with cash flows and the firm's paying ability, (b) examination of a sample of actual debt contracts and the measures of the restrictive debt covenants used by lenders and bondholders to protect their interest from corporate management actions of wealth transfers, and (c) interviews with loan officers at several banks. (JEL M40, M41, G15)