An Applied Study to Investigate the Explanatory Power of Dirty Surplus Items from Cost of Equity Capital Prespective in Egyptian Business Environment

Document Type : Original Article

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Accounting department Faculty of Commerce Damanhur University Damanhur Egypt

Abstract

Neither international accounting standards nor US accounting standards has provides any conceptual framework related to the nature of dirty surplus items. So, dirty surplus concept become unclear and has no conceptual basis until now. Regarding Egyptian business environment, the Egyptian accounting standard setters have amended Egyptian Accounting standard no, (1) "presentation of financial statements" during 2015. This step is confirmed on the increasing importance of dirty surplus items through the emphasis on the preparation of comprehensive income statement. In spite of the critical importance of dirty surplus accounting flows, there are a very limited previous literatures interested by its nature.Therefore, this study aims to provide a clearer description for the concept of dirty surplus accounting flows. In addition to investigate the usefulness of dirty surplus items by examine its effect on the cost of equity capital in Egyptian business environment. The study sample included 54 Egyptian listed companies, consisting 270 observations in the period 20082012.  The theoretical results show that there is an agreement among the previous literatures about a group of determinants and explanations which related to the nature of dirty surplus items. On the other hand, the application study finds a significant negative relationship between foreign currency transactions and assets revaluation reserve from one side and the cost of equity capital from the other side. Otherwise there is no relationship between available for sale securities and cost of equity capital. The researcher believes that the findings of the study results contribute to resolving the great debate about which items are more important to investors and should be reported in the comprehensive income statement. The results may be of potential interest to investors and financial analysts who depend on the financial data to take their decision and evaluate the companies. Further, the results would also be of potential interest to Egyptian standard setters to evaluate the effectiveness of the last amendment of accounting standards in Egyptian capital market.

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