Signalling Through Governance: Can Governance Reforms in Egypt Attract Foreign Capital by Reducing Perceived Information Risk?

Abstract

Attracting foreign capital is a persistent challenge for emerging markets plagued by perceptions of opacity and high information risk. This study investigates whether corporate governance (CG) reforms in Egypt function as a credible signal to international investors by reducing firm-specific information asymmetry. We theorize a mediation model where governance quality signals a commitment to transparency, thereby lowering perceived information risk (proxied by bid-ask spreads), which in turn attracts foreign institutional ownership. Using a sample of 326 firm-year observations from non-financial EGX 100 companies (2014-2018), we employ a two-stage least squares (2SLS) approach with an instrumental variable to establish causality, followed by path analysis. Results confirm that strong governance causally reduces information asymmetry. Crucially, path analysis reveals a significant indirect effect: governance attracts foreign capital almost entirely through this reduction in information asymmetry, supporting a full mediation model. Furthermore, this signaling effect is strongest for firms in opaque sectors and those with no prior foreign ownership, where the information deficit is greatest. The discussion frames these findings within signaling theory, positing governance as a strategic tool for capital attraction. The study implies that for firms, governance is an investment in reputation, and for regulators, it is a validated strategy for market development.